Thursday, September 20, 2012

Banking union: A federal model for the European Union with prompt corrective action

by Jacopo Carmassi, Carmine Di Noia and Stefano Micossi

September 20, 2012

The European Commission’s latest proposals for financial regulation are seen by many as the first steps towards a banking union. This column argues that there are a number of issues that need to be exposed and debated in public before the Commission decides on anything.

The European Commission has published its proposals for the transfer of supervisory responsibilities to the ECB providing a comprehensive and courageous ‘first step’ towards a European banking union (the other steps being European deposit insurance and resolution procedures). Yet, on a number of issues the commission’s chosen path raises questions that should be brought out in the open and fully recognised before final deliberation by the council.

Contents of banking union

In a highly integrated financial system, such as in the EU, taming moral hazard and excessive risk taking requires:
  • A consistent set of regulatory incentives, based not only on common rules;
  • Integrated supranational powers in banking supervision; and
  • Deposit insurance and crisis management, including resolution.
The three functions are intimately interconnected, and only their joint management can eradicate the expectation of national bailouts from the system and thus establish proper incentives against reckless risk taking by banks in the internal market. The commission proposal covers bank supervision and part of crisis management, but not deposit insurance and resolution.


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