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Firmer foundations for Banking Union
Dirk Schoenmaker
Institute of International and European Affairs
Dublin, 12 May 2016
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Agenda
• Rationale Banking Union
• Theory of policy coordination
• Empirics: European banking landscape
• Policy: Completing the Banking Union
• Conclusions
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Rationale Banking Union
Aim is to foster financial stability in Europe:
• Break diabolic loop -> Euro Area
ST answer to euro sovereign crisis
• Cross-border banking -> Single Market (EU)
LT answer to cross-border integration
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What is the problem?
Problem:
• Failure of large banks poses national andcross-border externalities
• Cross-border externalities are ignored bynational authorities
Why?
• Accountability to national politics (i.e. domestic taxpayers)
• National legislation/procedures for insolvency
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5
Nationalism“My country is my castle”
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Theory of international policy cooperation
• Game theory predicts that cooperation of
national resolution funds will not work (recent
financial crisis has confirmed this)
• Financial trilemma – choose 2 out of 3 policy objectives:
1. Maintain global financial stability
2. Foster cross-border banking
3. Preserve national authority
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The financial trilemma
1. Financial stability
3. National financial policies2. International banking
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Two stable outcomes
1. Supra-national solutions to keep internat. banks
a) Banking Union
2. National solutions with subsidiary-based banking
a) New Zealand (significant retail operations from Australia)
b) US (Intermediate Holding Company)
• It follows that Banking Union is an advantage also for countries with high degree of cross-border banking Nordic region and CEE
UK is a special case
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European banking landscape
• Cross border banking integration increased rapidly in the years before the crisis
• Mainly done through subsidiaries
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Cross-border credit growth
Ireland: from EU
Spain + Portugal: also domestic
100
150
200
250
300
350
400
Bank assets growth (2002 = 100)
Domestic
From EU
From third
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Cross-border banking– outward banking
Shows the exposure of multinational banking groups to other countries, beyond the domestic market
Top 10 Banks of Banking Union, end 2015
Banking GroupMarket share
BU (in %)
Total assets
(in € bn)
Home
(in %)
Rest of Europe (in %)RoW
(in %)BU non-BU
BNP Paribas (FR) 5.3% €1,994 25% 36% 15% 25%
Crédit Agricole (FR) 6.7% €1,699 81% 8% 2% 8%
Deutsche Bank (DE) 3.2% €1,629 26% 19% 9% 46%
Santander (ES) 2.3% €1,340 28% 11% 31% 29%
Société Générale (FR) 4.7% €1,334 72% 8% 11% 9%
BPCE (FR) 4.8% €1,167 91% 2% 1% 6%
UniCredit (IT) 2.8% €860 42% 31% 24% 2%
ING Bank (NL) 2.7% €842 36% 38% 11% 15%
BBVA (ES) 1.6% €750 39% 10% 15% 36%
Crédit Mutuel (FR) 3.0% €707 89% 8% 1% 3%
Top 30 banks 58.8% €18,119 58% 16% 11% 16%
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Cross-border banking – outward banking
Two Irish banks
Exposure to UK, but not to other BU countries
Banking GroupMarket share
BU (in %)
Total assets
(in € bn)
Home
(in %)
Rest of Europe (in %)RoW
(in %)BU non-BU
Bank of Ireland (UK) 0.4% € 131 64% 0% 36% 0%
Allied Irish Banks (IE) 0.4% € 103 84% 0% 16% 0%
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Current Banking Union framework
SRBECBEC ESM?NCBs
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Completed Banking Union
SDIRBECBEC ESMECB
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Conclusions
• Long term rational for BU is related to cross-border
banking
European Banking Supervision (SSM) has made a good start
Effective (consolidated view) and tough (higher capital)
• A stable Banking Union needs a firm foundation
Two rival foundations (European / national) not stable
Need for clear choice
Risk sharing and risk reduction
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Thank you for your attention
Bruegel