Abstract

The European Union is putting in place a scheme for a banking union. It will centralise banking regulation, supervision, resolution, and deposit insurance, with a common regulatory rule-book, supervisor, resolution authority, and deposit insurance scheme. In November 2014, the ECB will take over supervision of the 130 largest and most important financial institutions in the euro area. Meanwhile, it is assessing their balance sheets, to identify and remedy the so-called legacy issues. The Single Resolution Mechanism has been established. Banking union is intended to break the link between fiscally weak governments and fragile banking systems. Secondly, for banks that operate across national boundaries, regulation and supervision is better done by one supervisor; and resolution is quicker and cleaner. Thirdly, national regulators have become too close to the banks they regulate; centralised supervision will be better supervision. Fourthly, there are euro-area-wide spill-over effects from a bank failure; it is efficient to pool resources to provide insurance; pooling goes some way towards addressing “too big to fail” problem. Against this, centralisation may be a scheme for transferring resources to the financially weak states from the rest; and it may place too much power and responsibility in the hands of a single institution. It is not yet clear how effective the banking union will be. A great deal depends on how the comprehensive assessment of banks’ balance sheets works out, the rigour with which the legacy issues are identified, and how they are financed. Further ahead, after the ECB takes over supervision, the banking union’s impact will depend on the effectiveness of supervision and regulation by the ECB, and the way that the resolution regime operates. The bail-in principle has been loudly trumpeted, but how will it work? The back-up funds to pay for resolution when bail-in is insufficient seem inadequate. While the banking union could, in principle, prove a useful institution for pooling risk among states, improving the standards of bank supervision and regulation, and reversing the fragmentation of euro area banking, there remains a distinct possibility that it will, in fact, substantially act as a means of channelling resources from financially sound, predominantly northern member states to southern periphery states with financial and banking problems. The presentation will draw on the paper on Banking Union published by the author and others in the 2014 EEAG Report on the European Economy http://www.cesifo-group.de/ifoHome/policy/EEAG-Report/Archive/EEAG_Report_2014.html

Biographical Sketch

John Driffill (Ph.D., Princeton University, 1977) is a Professor of Economics at Birkbeck College, University of London, a Fellow of the Centre for Economic Policy Research, and the CESifo Research Network. He has previously worked at the University of Southampton, Tilburg University, and Queen Mary and Westfield College, University of London, and held visiting positions at Queen’s University (Kingston, Canada), in Stockholm, Aarhus, Tokyo, and Paris. From 2004 to 2010 he was the Director of the UK Economic and Social Research Council’s programme on World Economy and Finance. From 2000 to 2004 he was on the Council and Executive Committee of the Royal Economic Society. He has advised the House of Lords Select Committee on the European Union (Sub-Committee A: Economic and Financial Affairs) in enquiries into the euro and the Stability and Growth Pact. Most of his research has been on macroeconomics and monetary policy, and he has published in many scholarly journals, including the American Economic Review, the Review of Economic Studies, the Journal of Monetary Economics, and the European Economic Review. He has published two edited volumes, one on A Currency for Europe, another on The Role of Financial Markets in the Transition Process, and an introductory textbook, Economics with Joseph E. Stiglitz (W. W. Norton and Co, 2000).