Firmer foundations for Banking Union

Dirk Schoenmaker

Institute of International and European Affairs

Dublin, 12 May 2016

Agenda

• Rationale Banking Union

• Theory of policy coordination

• Empirics: European banking landscape

• Policy: Completing the Banking Union

• Conclusions

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

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

5

Nationalism“My country is my castle”

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

The financial trilemma

1. Financial stability

3. National financial policies2. International banking

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

European banking landscape

• Cross border banking integration increased rapidly in the years before the crisis

• Mainly done through subsidiaries

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

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%

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%

Current Banking Union framework

SRBECBEC ESM?NCBs

Completed Banking Union

SDIRBECBEC ESMECB

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

Thank you for your attention

Bruegel