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Mar 16, 2023 · Introduction. European Banking Union was presented by a range of national, European and international policymakers as a potential institutional development to reduce moral hazard for banks and sovereigns, which was frequently described as a major cause of the international financial crisis (IFC) that began in 2007 and the subsequent sovereign debt crisis in the Eurozone (e.g. De Grauwe ...
- Introduction to the special issue: the persistent challenges ...
However, all the elements of Banking Union allow for ongoing...
- Introduction to the special issue: the persistent challenges ...
Mar 16, 2023 · However, all the elements of Banking Union allow for ongoing government intervention and thus fail convincingly to tackle this collective action problem. Tackling the moral hazard for both banks and governments that resulted from these ties had been a major motivating factor for the establishment of Banking Union.
market participants do not seem to take the view that the banking union reduces a moral hazard problem that may emerge from a common lender of last resort and national responsibilities for banking supervision and resolution. Keywords: Euro area crisis, banking union, sovereign-bank nexus, systemic risk, event study JEL classification:G01, G21, G28
- Introduction
- Public Interventions in The Financial Sector in The Years 2008–2011
- A Rationale For Government Guarantees 14
- Drawbacks of Government Guarantees
- A New Set-Up to Think About Government Guarantees
- Concluding Remarks
The 2007 financial crisis has led to renewed interest and debate about government intervention in the financial sector. The use of public funds in this sector in the years 2008–13 was massive. The interventions took various forms ranging from recapitalization, to loans and implicit as well as explicit guarantees. With the exception of Lehman Brothe...
The financial crisis starting in August 2007 in the subprime mortgage market in the USA propagated rapidly across the world. As argued by Brunnermeier, 5 one of the major causes of the crisis was the bursting of the housing bubble in the USA in 2007. This was followed by a deterioration of the credit quality of subprime mortgages and an increase in...
The rigorous justification for the introduction of government guarantees in the academic literature dates back to the seminal paper by Diamond and Dybvig (1983) 15 and is related to the role that banks perform in the economy as liquidity providers. Banks issue liquid liabilities in the form of demandable deposits and invest mainly in illiquid asset...
As highlighted in the previous section, government guarantees are effective in preventing crises in a multiple equilibrium framework where runs emerge as a self-fulfilling phenomenon. In this context, government guarantees are always optimal. They prevent crises and allow the economy to reach the optimal allocation without entailing any costs. As m...
A recent paper by Allen, Carletti, Goldstein, and Leonello 35attempts to answer those questions by developing a rich theoretical framework that endogenizes the probability of a banking crisis and how it is affected by banks’ risk-taking choices and government guarantees. In this framework, the authors are able to characterize the overall trade-off ...
In this article, we contribute to the current debate about the desirability of government guarantees to financial institutions by challenging the view that public intervention in the financial system should be limited so as to control for the associated moral hazard problem. We argue that this view crucially relies on some of the assumptions and sp...
- Franklin Allen, Elena Carletti, Itay Goldstein, Agnese Leonello
- 2015
Feb 2, 2015 · The moral hazard problem associated with public intervention is seen in the pub-lic and academic debate as its major drawback. It can undermine the effectiveness of intervention in reducing financial instability,3 and thus magnify the costs for the gov-ernment in providing it. This has been used as a key argument to support the view
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Finally, I will also reflect on some implications of the Banking Union for the future of the financial system and for the role of macro-prudential policies. 1. The bank-sovereign feedback loop. What makes the link between sovereigns and banks important is the fact that, during the crisis, weak banks weakened the sovereign and vice versa.
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Jan 2, 2023 · ABSTRACT Banking Union was a major policy response to the financial crisis that began in 2007 and the subsequent Eurozone crisis. Moral hazard has frequently been presented as a major cause of these crises. Therefore, Banking Union can be understood as a response to moral hazard in relation to banks and sovereigns. Yet, moral hazard was an acknowledged and supposedly managed problem prior to ...
