Testing the resilience of Banking Union: Cost of Non-Europe Report

25-04-2016

This ‘Cost of Non-Europe Report’ examines the robustness of the Banking Union framework under various stress scenarios and identifies the cost of the lack of further European action in this field. The study suggests that the potential gains from a deepened Economic and Monetary Union would be substantial, should a new financial and/or sovereign crisis materialise. It comes to the conclusion that the currently proposed regulatory framework for Banking Union is not sufficient in terms of reserves and resources to fully mitigate the systemic impact of a new crisis. The report notably shows that, even if the Banking Union architecture foreseen for 2023 were already in place today, bailouts would still be needed at the expense of the European taxpayer, in order to withstand shocks, of a size comparable to that of 2007-2009. The costs at the euro-area level of a medium-sized financial shock are estimated to amount to a cumulated loss of 1 trillion euro in GDP (about -9.4% of GDP), job losses of 1.91 million and an increase of 51.4 billion euro in government debt. Assuming that such a shock occurs every ten years on average, the annualised costs would potentially amount to around 100 billion euro in output loss and 0.19 million job losses per annum. Actions at EU level could significantly reduce the likelihood of financial shocks materialising and of their impact on the real economy. This ‘Cost of Non-Europe’ report points to shortcomings in the current Banking Union architecture and identifies policy options to address them.

This ‘Cost of Non-Europe Report’ examines the robustness of the Banking Union framework under various stress scenarios and identifies the cost of the lack of further European action in this field. The study suggests that the potential gains from a deepened Economic and Monetary Union would be substantial, should a new financial and/or sovereign crisis materialise. It comes to the conclusion that the currently proposed regulatory framework for Banking Union is not sufficient in terms of reserves and resources to fully mitigate the systemic impact of a new crisis. The report notably shows that, even if the Banking Union architecture foreseen for 2023 were already in place today, bailouts would still be needed at the expense of the European taxpayer, in order to withstand shocks, of a size comparable to that of 2007-2009. The costs at the euro-area level of a medium-sized financial shock are estimated to amount to a cumulated loss of 1 trillion euro in GDP (about -9.4% of GDP), job losses of 1.91 million and an increase of 51.4 billion euro in government debt. Assuming that such a shock occurs every ten years on average, the annualised costs would potentially amount to around 100 billion euro in output loss and 0.19 million job losses per annum. Actions at EU level could significantly reduce the likelihood of financial shocks materialising and of their impact on the real economy. This ‘Cost of Non-Europe’ report points to shortcomings in the current Banking Union architecture and identifies policy options to address them.