Abstract
Abstract An important policy discussion on joining the banking union is currently taking place in Denmark and Sweden. In this article we review the pros and cons of joining. The main rationale for joining the banking union is the importance of cross-border banking in the EU internal market. Reviewing the banking systems, we find that banks in Denmark and Sweden have the same cross-border characteristics as those in the euro area countries, suggesting a similar rationale for joining the banking union. Moreover, both countries have large banks which may be too big to save at country level, but not at the banking union level. Nevertheless, there are some governance concerns. While euro area countries have an automatic and full say in all banking union arrangements, the non-euro area countries (the ‘out’ countries) lack certain formal powers in ultimate decision-making; however, we find that this may be less of a problem in practice. If necessary, the ‘out’ countries would have the ‘nuclear option’ of leaving the banking union.
Highlights
The euro crisis was the immediate motivation for the establishment of the banking union in Europe in 2012
While euro area countries have an automatic and full say in all banking union arrangements, the non-euro area countries lack certain formal powers in ultimate decision-making; we find that this may be less of a problem in practice
That raises the question whether countries that are outside the euro zone but that participate in the EU internal market should join the banking union
Summary
The euro crisis was the immediate motivation for the establishment of the banking union in Europe in 2012. CROSS-BORDER BANKING The perceived need for a banking union in Europe has been widely motivated by the negative spiral that can result when banks hold sovereign bonds and governments bail out banks. This close link between banks and government solvency has, since the euro sovereign debt crisis, been seen as one of the biggest threats to financial stability in Europe. In order to provide financial stability in country A, the authorities in country A need information (about capital and liquidity positions of distressed banks) from the
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