Working Paper: CEPR ID: DP13254
Authors: Mathias Hoffmann; Egor Maslov; Iryna Stewen; Bent E. Sørensen
Abstract: The interplay of equity market and banking integration is of first-order importance for risk sharing in the EMU. While EMU created an integrated interbank market, "direct'' banking integration (in terms of direct cross-border bank-to-real sector flows or cross-border banking-consolidation) and equity market integration remained limited. We find that direct banking integration is associated with more risk sharing, while interbank integration is not. Further, interbank integration proved to be highly procyclical, which contributed to the freeze in risk sharing after 2008. Based on this evidence, and a stylized DSGE model, we discuss implications for banking union. Our results show that real banking integration and capital market union are complements and robust risk sharing in the EMU requires both.
Keywords: capital union; banking union
JEL Codes: F15; F36; F45
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| direct banking integration (G21) | income risk sharing (G52) |
| direct banking integration (G21) | access to stable financing (G32) |
| access to stable financing (G32) | income smoothing (D15) |
| interbank integration (F30) | risk sharing (D16) |
| collapse in interbank lending post-2008 (F65) | consumption smoothing (D15) |
| lack of direct banking integration + limited equity market integration (F65) | failure of risk sharing (D81) |
| direct banking integration + capital market union (F36) | robust risk sharing (D80) |