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2019 | OriginalPaper | Chapter

Trust in the Euro and the EU’s Banking Union After the Financial Crisis

Authors : Clas Wihlborg, Sarkis J. Khoury

Published in: Trust in the European Union in Challenging Times

Publisher: Springer International Publishing

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Abstract

Wihlborg and Khoury examine whether greater institutional flexibility can strengthen confidence in the euro and the European banking union. The authors highlight the costs and benefits of harmonization as compared with those arising from competition among national regulatory frameworks. Greater trust requires either that some EU member states abandon the euro as their currency, or that they effect far-reaching structural reforms. Politically, it is advantageous to divide the euro zone into two different currency areas. Regarding the EU’s banking union, Wihlborg and Khoury contend that market discipline with regard to banks’ risk-taking improves national regulatory frameworks through institutional competition. Mutual recognition between national supervisory authorities requires harmonization of rules for dealing with troubled banks, as well as for banking regulation and supervision.

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Footnotes
1
As of January 2018, the euro zone consists of Austria, Belgium, Cyprus, Estonia, Finland, France, Germany, Greece, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, the Netherlands, Portugal, Slovakia, Slovenia and Spain. Other EU member states (except for Denmark and the UK) are formally obliged to join once they meet the criteria but, de facto, no EU member state can be forced to adopt the euro. Andorra, Monaco, San Marino and the Vatican have formal agreements with the EU to use the euro as their official currency and issue their own coins. Kosovo and Montenegro have adopted the euro unilaterally, but these countries do not officially form part of the euro zone and do not have representation in the ECB.
 
2
The theory of monetary policy began to incorporate the game theoretic concepts of time-inconsistency, monetary policy rules and credibility (see e.g. Kydland & Prescott, 1977; Barro & Gordon, 1983).
 
3
Sykes (2000) noted that institutional competition among regulators can reduce the scope for regulatory capture. Barth et al. (2012) provide evidence from the 2007–2009 financial crisis, supporting the view that regulatory capture is an important problem in the banking sector.
 
4
Luciano and Wihlborg (2018) show that a subsidiary organization can economize on bankruptcy costs since individual subsidiaries are able to enter bankruptcy.
 
5
Sweeney, Goldberg and Wihlborg (2007) analyze the case of the pan-Nordic bank Nordea. This bank is the result of the merger of four major banks in four Nordic countries. It operated subsidiaries in the four countries while having the strategic objective of integrating functions across the subsidiaries strongly. In 2004, the bank developed plans to reorganize as a branch organization, but the plan fell through as a result of objections from supervisors as well as for internal reasons. The plan was recently revived in 2017 with plans to create a bank with Finland as home country.
 
6
The IMF Global Financial Stability Report estimates that the funding subsidies for large banks in 2013 amounted to 15 basis points in the US, 20–60 basis points in Japan and the UK, and 60–90 basis points in the euro zone (IMF, 2014).
 
7
The great differences in non-performing loans in member states’ banking systems are indicators of the differences in law and regulation that affect the credit risks banks are facing (European Shadow Financial Regulatory Committee, 2017).
 
8
For example, on 20 February 2012, the spread on interbank loans to the Danske Bank relative to Euribor was 7.05 basis points according to Wihlborg (2012).
 
9
The Bank Recovery and Resolution Directive (BRRD) for all EU members specifies requirements for procedures for closing and resolving insolvent banks at the national level. These procedures took effect on 1 January 2016. But their credibility has the same weakness as the SRM for the euro zone (Wihlborg, 2017).
 
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Metadata
Title
Trust in the Euro and the EU’s Banking Union After the Financial Crisis
Authors
Clas Wihlborg
Sarkis J. Khoury
Copyright Year
2019
Book
Trust in the European Union in Challenging Times

Print ISBN: 978-3-319-73856-7

Electronic ISBN: 978-3-319-73857-4

Copyright Year: 2019

DOI
https://doi.org/10.1007/978-3-319-73857-4_6