Banking union: Mind the gaps

Abstract

This paper reviews the various mechanisms and rules that have been proposed to create a banking union in Europe. We argue that the banking union is a promising solution to the Eurozone crisis because it completes the unification of the Euro currency, forms a solution to both the financial and monetary fragmentation of the Euro zone financial markets and helps break the vicious cycle created by domestic banking system impairments and the sovereign debt crisis. We underline the shortcomings and hurdles to attaining a fully-fledged banking union, and the hazards created by the inconsistencies between the phasing-in of the sequential programme decided by European member states. Various suggestions are made to fill the gaps created by the current architecture: establishing a shared-bailout rule to absorb the remaining losses, simplifying the organisation of banking groups and creating a truly federal deposit insurance scheme.