Incentive compatible relationship between ERMII and Close-Cooperation in the Banking Union: The case of Bulgaria and Croatia

The ambition to expand participation in the European Banking Union was to allow the "outs" to enter in to close cooperation, however, it did not include the simultaneous joining of ERM II. Focusing on the cases of Bulgaria and Croatia, this paper attempts to respond to a number of questions: What is the rationale behind the double requirement of having to simultaneously apply to become a member of the ERM II and to prepare to become a member of the Banking Union via rule based "close cooperation" mechanism of coordination between the EU non-euro area NCAs and the ECB? Does the integration of close cooperation countries' banking systems with the euro area banking systems support the decision to join ERM II and "opting-in" to the SSM? Do the existing "close cooperation" arrangements guarantee greater coordination of resource-allocating decisions on prudential supervision and improved internalization of financial stability decisions? What are the advantages of the preparation to become a full member of the euro area and the SSM (e.g. coordination of macro and micro-prudential regulation; coordination of micro-prudential supervision and bank resolution)? It is evident from the research undertaken in this paper that there are clear benefits from close cooperation for the respective Member States whose domestic currencies are already linked to the euro in view of the dominant position eurozone banks have in their respective domestic markets.