Skip to main content
SpringerLink
Log in

Trust in the Euro and the EU’s Banking Union After the Financial Crisis

  • Chapter
  • First Online:
Trust in the European Union in Challenging Times

  • 535 Accesses

Abstract

Wihlborg and Khoury examine whether greater institutional flexibility can strengthen confidence in the euro and the European banking union. The authors highlight the costs and benefits of harmonization as compared with those arising from competition among national regulatory frameworks. Greater trust requires either that some EU member states abandon the euro as their currency, or that they effect far-reaching structural reforms. Politically, it is advantageous to divide the euro zone into two different currency areas. Regarding the EU’s banking union, Wihlborg and Khoury contend that market discipline with regard to banks’ risk-taking improves national regulatory frameworks through institutional competition. Mutual recognition between national supervisory authorities requires harmonization of rules for dealing with troubled banks, as well as for banking regulation and supervision.

This is a preview of subscription content, log in via an institution to check access.

Access this chapter

Log in via an institution
Chapter
USD 29.95
Price excludes VAT (USA)
  • Available as PDF
  • Read on any device
  • Instant download
  • Own it forever
eBook
USD 84.99
Price excludes VAT (USA)
  • Available as EPUB and PDF
  • Read on any device
  • Instant download
  • Own it forever
Softcover Book
USD 109.99
Price excludes VAT (USA)
  • Compact, lightweight edition
  • Dispatched in 3 to 5 business days
  • Free shipping worldwide - see info
Hardcover Book
USD 159.99
Price excludes VAT (USA)
  • Durable hardcover edition
  • Dispatched in 3 to 5 business days
  • Free shipping worldwide - see info

Tax calculation will be finalised at checkout

Purchases are for personal use only

Institutional subscriptions

Notes

  1. 1.

    As of January 2018, the euro zone consists of Austria, Belgium, Cyprus, Estonia, Finland, France, Germany, Greece, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, the Netherlands, Portugal, Slovakia, Slovenia and Spain. Other EU member states (except for Denmark and the UK) are formally obliged to join once they meet the criteria but, de facto, no EU member state can be forced to adopt the euro. Andorra, Monaco, San Marino and the Vatican have formal agreements with the EU to use the euro as their official currency and issue their own coins. Kosovo and Montenegro have adopted the euro unilaterally, but these countries do not officially form part of the euro zone and do not have representation in the ECB.

  2. 2.

    The theory of monetary policy began to incorporate the game theoretic concepts of time-inconsistency, monetary policy rules and credibility (see e.g. Kydland & Prescott, 1977; Barro & Gordon, 1983).

  3. 3.

    Sykes (2000) noted that institutional competition among regulators can reduce the scope for regulatory capture. Barth et al. (2012) provide evidence from the 2007–2009 financial crisis, supporting the view that regulatory capture is an important problem in the banking sector.

  4. 4.

    Luciano and Wihlborg (2018) show that a subsidiary organization can economize on bankruptcy costs since individual subsidiaries are able to enter bankruptcy.

  5. 5.

    Sweeney, Goldberg and Wihlborg (2007) analyze the case of the pan-Nordic bank Nordea. This bank is the result of the merger of four major banks in four Nordic countries. It operated subsidiaries in the four countries while having the strategic objective of integrating functions across the subsidiaries strongly. In 2004, the bank developed plans to reorganize as a branch organization, but the plan fell through as a result of objections from supervisors as well as for internal reasons. The plan was recently revived in 2017 with plans to create a bank with Finland as home country.

  6. 6.

    The IMF Global Financial Stability Report estimates that the funding subsidies for large banks in 2013 amounted to 15 basis points in the US, 20–60 basis points in Japan and the UK, and 60–90 basis points in the euro zone (IMF, 2014).

  7. 7.

    The great differences in non-performing loans in member states’ banking systems are indicators of the differences in law and regulation that affect the credit risks banks are facing (European Shadow Financial Regulatory Committee, 2017).

  8. 8.

    For example, on 20 February 2012, the spread on interbank loans to the Danske Bank relative to Euribor was 7.05 basis points according to Wihlborg (2012).

  9. 9.

    The Bank Recovery and Resolution Directive (BRRD) for all EU members specifies requirements for procedures for closing and resolving insolvent banks at the national level. These procedures took effect on 1 January 2016. But their credibility has the same weakness as the SRM for the euro zone (Wihlborg, 2017).

References

  • Barro, R. J., & Gordon, D. B. (1983). A positive theory of monetary policy in a natural rate model. Journal of Political Economy, 91(4), 589–610.

    Article  Google Scholar 

  • Barth, J. R., Caprio, G., & Levine, R. (2012). Guardians of finance. Cambridge, MA: MIT Press.

    Google Scholar 

  • Brierley, P. (2016). Presentation at the conference of the National Institute for Economic and Social Research (NIER) on 18 March 2016. Retrieved from www.niesr.ac.uk/financial-regulation-are-we-reaching-efficient-outcome

  • Cabo-Valverde, S., Benink, H., Berglund, T., & Wihlborg, C. (2015). Regulatory response to the financial crisis in Europe: Recent developments 2010–2013. Journal of Financial Economic Policy, 7(1), 29–50.

    Article  Google Scholar 

  • De Grauwe, P., & Mongelli, F. P. (2005). Endogeneities of optimum currency areas: What brings countries sharing a single currency closer together? Working Paper Series, no. 468, European Central Bank. Retrieved from http://www.ecb.europa.eu/pub/pdf/scpwps/ecbwp468.pdf

  • European Commission. (1990, October). One money, one market: An evaluation of the potential benefits and costs of forming an economic and monetary union. European Economy, vol. 44.

    Google Scholar 

  • European Commission. (2014). Banking Union: Restoring financial stability in the Eurozone. Memo.14/294, Brussels, 15 April 2014.

    Google Scholar 

  • European Shadow Financial Regulatory Committee. (2014, November 10). Complexity and credibility in the single resolution mechanism. Statement, no. 39.

    Google Scholar 

  • European Shadow Financial Regulatory Committee. (2017, January 24). Legacy problems as a threat to the Banking Union. Statement, no. 43.

    Google Scholar 

  • Frankel, J. A., & Rose, A. K. (1998). The endogeneity of the optimum currency area criteria. The Economic Journal, 108(449), 1009–1025.

    Article  Google Scholar 

  • Hertig, G., & McCahery, J. A. (2003). Company and takeover law reforms in Europe: Misguided harmonization efforts or regulatory competition? European Business Organization Law Review (EBOR), 4(2), 179–211.

    Article  Google Scholar 

  • International Monetary Fund. (2014). Global financial stability report. Washington, DC: IMF.

    Google Scholar 

  • Kerber, W. (2000). Interjurisdictional competition within the European Union. Fordham International Law Journal, 23, 217–249.

    Google Scholar 

  • Kydland, F. E., & Prescott, E. C. (1977). Rules rather than discretion: The inconsistency of optimal plans. Journal of Political Economy, 85(3), 473–491.

    Article  Google Scholar 

  • Luciano, E., & Wihlborg, C. (2018). Financial synergies and systemic risk in the organization of bank affiliates. Journal of Banking and Finance, 89, (March).

    Google Scholar 

  • Nouy, D. (2014). Towards the European Banking Union: achievements and challenges. Speech at the OeNB Conference, Vienna, 12 May 2014.

    Google Scholar 

  • Prabha, A. P., & Wihlborg, C. (2014). Implicit guarantees, business models and banks’ risk-taking through the crisis: Global and European perspectives. Journal of Economics and Business, 76, 10–38.

    Article  Google Scholar 

  • Romano, R. (2006). The states as a laboratory: Legal innovation and state competition for corporate charters. Yale Journal on Regulation, 23(2), 209–247.

    Google Scholar 

  • Schmidt, R. H., & Spindler, G. (2002). Path dependence, corporate governance and complementarity. International Finance, 5(3), 311–333.

    Article  Google Scholar 

  • Sweeney, R. J., Goldberg, L., & Wihlborg, C. (2007). The Nordea experiment: Evidence from market and accounting data. Journal of Banking and Finance, 31(4), 1265–1286.

    Article  Google Scholar 

  • Sykes, A. O. (2000). Regulatory competition or regulatory harmonization? A silly question? Journal of International Economic Law, 3(2), 257–264.

    Article  Google Scholar 

  • Tower, E., & Willett, T. D. (1976). The theory of optimum currency areas and exchange rate flexibility. Special Papers in International Finance, no. 11. Princeton, NJ: Princeton University.

    Google Scholar 

  • Trachtman, J. P. (2000). Regulatory competition and regulatory jurisdiction. Journal of International Economic Law, 3(2), 331–348.

    Article  Google Scholar 

  • Vaubel, R. (2009). The future of fiscal federalism and the need for global government: A response to Vito Tanzi. European Journal of Political Economy, 25(1), 133–136.

    Article  Google Scholar 

  • Wihlborg, C. (2012). Developing distress resolution procedures for financial institutions. SUERF Study, no. 4.

    Google Scholar 

  • Wihlborg, C. (2017). Bail-ins: Issues of credibility and contagion. SUERF Policy Note, no. 10.

    Google Scholar 

  • Wihlborg, C., & Willett, T. D. (1991). Optimum currency areas revisited. In M. Fratianni, C. Wihlborg, & T. D. Willett (Eds.), Financial regulation and monetary arrangements after 1992. Amsterdam: Elsevier.

    Google Scholar 

  • Wihlborg, C., Willett, T. D., & Zhang, N. (2010). The euro debt crisis: It isn’t just fiscal. World Economics, 11(4), 51–77.

    Google Scholar 

  • Willett, T. D., Permpoon, O., & Wihlborg, C. (2010). Endogenous OCA analysis and the early euro experience. The World Economy, 33(7), 851–872.

    Article  Google Scholar 

  • Wyplosz, C. (2006). European Monetary Union: the dark sides of a major success. Economic Policy, 21(46), 208–261.

    Article  Google Scholar 

Download references

Author information

Authors and Affiliations

  1. Chapman University, Orange, CA, USA

    Clas Wihlborg

  2. University of California at Riverside, Riverside, CA, USA

    Sarkis J. Khoury

Authors
  1. Clas Wihlborg
    View author publications

    You can also search for this author in PubMed Google Scholar

  2. Sarkis J. Khoury
    View author publications

    You can also search for this author in PubMed Google Scholar

Editor information

Editors and Affiliations

  1. Department of Law, Stockholm University, Stockholm, Sweden

    Antonina Bakardjieva Engelbrekt

  2. Uppsala University, Uppsala, Sweden

    Niklas Bremberg

  3. Department of Government, Uppsala University, Uppsala, Sweden

    Anna Michalski

  4. University of Agder, Kristiansand, Norway

    Lars Oxelheim

Rights and permissions

Reprints and permissions

Copyright information

© 2019 The Author(s)

About this chapter

Check for updates. Verify currency and authenticity via CrossMark

Cite this chapter

Wihlborg, C., Khoury, S.J. (2019). Trust in the Euro and the EU’s Banking Union After the Financial Crisis. In: Bakardjieva Engelbrekt, A., Bremberg, N., Michalski, A., Oxelheim, L. (eds) Trust in the European Union in Challenging Times. Palgrave Macmillan, Cham. https://doi.org/10.1007/978-3-319-73857-4_6

Download citation

Publish with us

Policies and ethics

Search

Navigation