How to Form a More Perfect European Banking Union

Policy Brief
13-23
October 2013

The evolving plan for a European banking union falls short of the ideal of an "ever closer union." In fact, the plan's focus on national resolution authorities and funds for insolvent financial institutions, a minimal euro area financing backstop, and costs imposed on creditors of failed banks, could lead to a looser, weaker, and more fragmented banking system. Some aspects of the plan of European leaders will improve the system's soundness, but other aspects could dampen lending in the near term and reduce economic growth. Ubide urges policymakers to focus on making the banking union stronger and more coherent. Troubled banks supervised by the European Central Bank should be covered by a European resolution authority and a European resolution fund to oversee bankruptcy, restructuring, and other reforms. To produce a more united, solid, and stable euro area, the European plan has to lower national barriers to banking, not raise them.