Banking union: the problem of untried systems

Abstract

This article explores the problems the EU and the SRB face in trying to implement a credible system for resolving banks without the use of taxpayer funds as a key part of banking union that avoids the doom loop between indebted banks and indebted sovereigns. It finds that without clear examples of how the system works in practice it is very difficult to provide convincing evidence of what will happen given the large number of options for bailing in, the continuing predilection for bailing out in some states and the lack of fiscal backstop for general threats to financial stability.

Stillborn Banking Union: Explaining Ineffective European Union Bank Resolution Rules†

“…Our liberal intergovernmental analysis aligns with a number of other studies which point to messy Franco-German compromises on the core elements of Banking Union (Schild, 2018) and thus deficiencies in the design of Banking Union (Goodhart and Avgouleas, 2019;Mayes, 2018). Our analysis supports claims made by a number of scholars pointing to the importance of banking system structures in shaping government preferences on both the building blocks and core elements of Banking Union (Howarth and Quaglia, 2018) and to the immense power of banks in shaping national preferences and the outcomes on Banking Union (Culpepper and Tesche, 2020).…”

“…Thus, a central element of European Banking Union is found lacking. In the meantime, a number of national resolution funds have not been filled to schedule and the Single Resolution Fund – even if it reaches the planned €50 billion figure – is likely insufficient to resolve large European banks and thus boost confidence in the capacity of the EU resolution regime to avoid a systemic crisis (Mayes, 2018). However, the aim of our contribution is to demonstrate that the likelihood that these bank‐provided resolution funds can ever be used to support resolution is limited because too many EU banks are unable to assume their share of the losses, prior to bail‐in, thus preventing resolution.…”

Advocacy coalitions and the lack of deposit insurance in Banking Union

“…An embedded liberal camp (Ruggie 1982) involving Italy and France sees cushioning default with public money as essential and desirable, both to preserve local financial stability in an open international environment and consumer protection (Cerrone 2018). Their differing understanding of the broader public policy issue at hand led them to understand completely different things regarding how EDIS fits into the bigger picture of financial stability, and as a consequence, which institutions had to be developed next and policies carried out (Mayes 2018).…”

Institutional Architecture of the Euro Area

“…The euro area crisis that erupted in 2010 and lasted several years, highlighted that in order for the whole institutional structure to work, centralized financial supervision would need to be strengthened. Scholars such as De Rynck (), Donnelly (), Howarth and Quaglia (), Leblond (), Mayes () and Véron (), have researched why it took until 2012 for much of the Banking Union to be put onto the agenda, and longer still to complete it. To date the EU has managed to take steps towards a Single Supervisory Mechanism and a single resolution mechanism (SRM).…”