Towards a european banking union

Abstract

The EU and particularly the euro area, is a strong bank – dominated economy area. Banksprovide liquidity to the businesses and thus inject money into the real economy. Bank-creditis the main source of internal (domestic) and external (international) financing for transfrontierbusinesses. Banking sector is the most essential tool in the European financialsystem, providing almost two thirds of total credit. It plays a fundamental role in thedevelopment of the single market, due to its financial intermediation. Thus, banks acting asfinancial intermediaries were exposed to various risks, thus, being vulnerable to “liquiditydisruptions” due to the interconnectedness of cross-border bank’s operations. This led to“spillover effects”, which affects not only the countries’ economy, but also the globalfinancial system.On the other hand, although, the introduction of the euro as the single currency acted as acatalyst, moving forward the market integration and increasing the liquidity of the bondmarket, however, the integration of bank credit-markets lagged behind. “Nationalretrenchment of assets and liabilities”, domestic bias and narrow cross – border bank’soperations led to a large fragmentation along national borders (Alina, LigiaDimitresku,2014). This ongoing fractionalisation in the EU single market has been reported by EBA inits Risk assessment of the European Banking system. In EBA’s report was stressed that thissituation was fuelled because of “banks revised business strategies, changes in risk appetite,higher funding costs and the challenging macro-environment”; it has also been deteriorateddue to “uncoordinated national policy measures cum ring-fencing of local and cross-borderbank’s capital and liquidity” (Alina, LigiaDimitresku, 2014). Income and profitability of EUbanks worsened during the financial crisis, while the deterioration of asset’s quality furtherexacerbated bank’s earnings and capital adequacy, corroding (future) economic performance.Additionally, the decline of bank’s loan portfolios quality during the crisis escalated the riskpremia, slowing down the banking activity the global financial outcome.