16 October 2012

VoxEU eBook: 'Banking Union for Europe - Risks and Challenges'

While a banking union for Europe has been discussed by economists since even before the 2007 crisis, the issue has now moved up to the top of the eurozone agenda. But what kind of banking union? For whom? Financed how? And managed by whom? This new Vox eBook comprises 15 papers on the topic by leading economists.

Banking regulation and supervision have been key issues of concern and consideration in trying to find appropriate solutions to the problems currently facing the eurozone, to the extent that the link between sovereign debt and banking risk in Europe was recently described by the European Council as a “vicious cycle” that must be broken. In trying to deal with the challenge of unsustainable cross-border private debt in Europe, the European Commission has recently proposed to establish a more unified banking supervision mechanism in the form of a banking union, which will fall under the auspices of the European Central Bank. However, the road to banking union is beset with many obstacles, not least political intransigence.

This Vox eBook brings together the views of leading European and US economists on some of those obstacles and offers valuable insights, recommendations and some proposed solutions for the way forward. In his introductory chapter, Thorsten Beck summarises some of the key messages that emerge from the eBook, such as the importance of recognising that there can be no piecemeal approach to banking union, in that centralising supervision alone at the supra-national level, while leaving bank resolution and recapitalisation at the national level could have an adverse effect.

Second, that a banking union should be part of a larger reform package that addresses sovereign fragility and the dangerous entanglement of bank and sovereigns. Another important recommendation of the book is to address the potential conflict between immediate crisis resolution whilst at the same time ensuring that the appropriate structures are in place to enable the many long-term institutional reforms that are now so clearly needed.

These books are produced rapidly and are timed to catch the wave as the issue under discussion reaches a high point of debate amongst world leaders and decision-makers. The topic of this eBook is no exception to that pattern in that, on Thursday 18 October 2012, the European Council, involving heads of state or government of the EU Member States and the President of the European Commission, will meet to discuss “progress made on the proposal on a single European banking supervision mechanism and, where necessary, set further orientations. It will also look at the wider issues of banking union and its components”.

A solution must be found, and quickly, for Europe’s failing banks. As was noted in the last Vox eBook on The Future of Banking, the banking crisis also has potentially massive global implications, in that, if European banks fail then there will be serious problems for Asian and US lenders too. The IMF has recently stated that a banking union in Europe is "indispensable" and must include the critical elements of “a pan- European deposit guarantee scheme, and a pan-European resolution mechanism with common backstops”. There are of course many obstacles and challenges, as this eBook clearly illustrates, but there at least seems to be agreement on the basic concept and necessity of a banking union in Europe.

The authors do not necessarily agree on every single issue and point to several tradeoffs. However, there are several consistent messages coming out of this book:

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