11 October 2024

Parliament study: Banking union and the long wait for cross-border integration

By GOTTI, MCCAFFREY, VERON:The banking union project has achieved European-level policy integration of microprudential supervision but not of crisis intervention. This largely explains the disappointing progress in the cross-border integration of the banking sector...

The banking union project has achieved European-level policy integration of microprudential supervision but not of crisis intervention. This largely explains the disappointing progress in the cross-border integration of the banking sector, which we document using data on banks’ assets and also specifically on their sovereign exposures. In a capital markets union, there is no equivalent of the banking crisis intervention framework and related public financial safety net, and therefore supervisory integration can have more direct catalytical impact in that context than in banking. 

This document was provided by the Economic Governance and EMU Scrutiny Unit at the request of the ECON Committee.

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This paper is a contribution to debates about Europe’s banking union, understood here as the project to eliminate the bank-sovereign vicious circle in the euro area by pooling the prudential framework at European level1. The prudential framework, in turn, is understood as comprising prudential supervision as well as crisis intervention. We explain in the introduction why this stylised description is preferable to the widespread reference to three pillars of supervision, resolution and deposit insurance. As for prudential supervision, it is divided into microprudential and macroprudential.
By this yardstick, microprudential supervision2 is the only complete piece of the banking union. By contrast, macroprudential supervision and the crisis intervention framework (which includes resolution, normal insolvency proceedings in the individual member states, deposit insurance, state aid and its control) still involve unwieldy combinations of national and European decision-making processes, policy instruments and, for crisis management, financial resources.
The paper is mainly devoted to empirical analysis of the level of European integration of the banking system.3 It focuses on two areas of observation.

The first is the politically sensitive but critical issue of banks’ sovereign exposures. We present detailed individual time series of home bias and of capital coverage for most significant banks, starting where possible in the early 2010s. The data supports the claim that most banks’ sovereign exposures remain highly concentrated in their home countries, and are a major threat to their solvency in scenarios of sovereign credit stress, with greater granularity than any prior publicly available analysis we are aware of.

The paper’s second contribution is a point-in-time mapping, at the end of 2023, of all assets of significant institutions in the banking union, disaggregating them on a country-by-country basis to the (considerable albeit imperfect) extent allowed by publicly available information. The mapping dataset enables some analysis of both the skewedness of national banking systems towards domestically-headquartered banks and, conversely, of the asset home bias of large banking groups towards their home country. Both are high....

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