Financial stability and integration in the banking union

How stable and resilient is the euro area’s Banking Union? The answer depends on the fundamentals of the euro area’s financial sector as much as on the Banking Union’s novel institutional and normative framework. The prospects for financial stability are thus contingent on the evolution of banks’ portfolios, conditions of operation and industrial structure, as reshaped by the crisis (section 1). In particular, the degree of integration of financial markets and banking systems is a key factor: continuing fragmentation is bound to have negative implications also in terms of resilience (section 2). Turning to public prudential regulation and crisis management, the establishment, as part of the Banking Union project, of streamlined decision-making mechanisms for the supervision and resolution of banks may not be enough; coherent and credible arrangements for the financing of resolution actions and, more generally, for the provision of a uniform and effective safety net are also needed. With a convincing and equitable set of burden-sharing arrangements, a future financial shock would be less destabilizing and a relapse to conditions of market fragmentation could be avoided (section 3). It should be noted, however, that a proper appreciation of the situation regarding the safety net should take explicitly into account the close interactions between banking regulation and monetary policy. From this perspective, the ultimate question is, whether the Banking Union can provide simultaneously effective stabilization mechanisms and robust market discipline, through unwaveringly strict enforcement of prudential standards and banks’ budgetary constraints (section 4).