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Beyond the Pandemic: Reviving Europe’s Banking Union

Ignazio Angeloni reviews in his report Europe’s banking union and suggests possible regulatory changes to revive the project, focused on three strategic goals: reducing overbanking, especially among the weaker players; favouring consolidation and efficiency among the stronger ones; and strengthening balance sheets further, while encouraging cross-border diversification.

CEPR Press 2020 – Report
26 May 2020
Source: CEPR policy portal VOX

Author:
Ignazio Angeloni, Harvard Kennedy School

Beyond the Pandemic: Reviving Europe’s Banking Union

About the report:

Although the euro area banks are better capitalised and more robust, the central objectives of the banking union remain elusive, writes the author. The banking sector remains fragmented, overbanked and largely unprofitable. Stock market values are depressed. According to the author, cross-border banking has not picked up, hence the benefits of risk diversification are not attained. The large euro area banks struggle to hold their position in the global competitive playfield. In his view, the coronavirus crisis adds to the problems. At present, the market mechanisms are suspended under a layer of state guarantees and regulatory forbearance. As the economy recovers and the public support is lifted, however, the preexisting weaknesses will come back to the fore, magnified.

The author reviews the situation and suggests possible regulatory changes to revive the banking union, focused on three strategic goals: reducing overbanking, especially among the weaker players; favouring consolidation and efficiency among the stronger ones; and strengthening balance sheets further, while encouraging cross-border diversification. The proposed measures cover, among other areas, the crisis management mechanism, with a revamp of the instruments and functions of the SRB; banking supervision, to enhance the ECB’s action in the micro- and macroprudential fields; and the state-aid controls in the banking sector.

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