This paper analyses the benefits of the prospective banking union for the EU. The most immediate driver behind the banking union is to break the 'diabolic loop' between the solvency of national governments and national banks.
An anticipated benefit of the prospective European banking union is stronger supervision of European banks. Another benefit would be enhanced resolution of banks in distress. While national governments confine themselves to the domestic effects of a banking failure, a European Resolution Authority would follow a supranational approach, under which domestic and cross-border effects within Europe are incorporated.
Using a model of recapitalising banks, this paper develops indicators to measure the efficiency improvement of resolution. Next, these efficiency indicators are applied to the hypothetical resolution of the top 25 European banks, which count for the vast majority of cross-border banking in Europe. The cost-benefit analysis indicates that the UK, Spain, Sweden and the Netherlands are the main beneficiaries and thus have the largest economic incentives to join Europe’s banking union.
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