Banking Union as a Shock Absorber

Arbeitspapier

This study investigates the shock-absorbing properties of a banking union by providing a detailed comparison between the way regional financial shocks have been absorbed at the federal level in the US, but have led to severe regional (national) financial dislocation and tensions in the euro area. The extent to which the institutions of the banking union, which is now emerging in the euro area, should increase its capacity to deal with future regional boom and bust cycles is also discussed. Cross-border capital flows in the form of equity appear to be much more stable than those taking the form of credit, especially inter-bank credit. Moreover, credit booms and bust leave a debt overhang and losses can materialise only via insolvencies, whereas equity flows absorb automatically losses in case of a bust and provide the cross border owner with incentives to continue to provide financing. It follows that cross-border banks can absorb regional shocks. But large banks pose the 'too big to fail' problem and they would also propagate regional shocks, especially if they originate in large countries, to the entire area.

Object Details

• ISBN: 978-3-86788-626-0
• Language: Englisch

References and Relationships

• Bibliographic citation: Series: Ruhr Economic Papers ; No. 548

Classification and Topics

• Classification: Wirtschaft ; Monetary Systems; Standards; Regimes; Government and the Monetary System; Payment Systems ; Monetary Policy, Central Banking, and the Supply of Money and Credit: General ; Banks; Depository Institutions; Micro Finance Institutions; Mortgages
• Subject: banking union ; currency union ; default ; shock absorber ; two-tier reinsurance system

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Belke, Ansgar ; Gros, Daniel
• Event: Veröffentlichung
• (who): Rheinisch-Westfälisches Institut für Wirtschaftsforschung (RWI)
• (where): Essen
• (when): 2015

Further information

• DOI: doi:10.4419/86788626
• Handle: http://hdl.handle.net/10419/110593
• Last update: 10.03.2025, 11:42 AM CET