H63 - National Debt; Debt Management; Sovereign DebtReturn

This paper evaluates the main shortcomings and potential risks of the current shape of the EU's banking union. The institutional set-up of the single banking supervision is called into question; the rationale behind its establishment is explained and possible drawbacks are pointed out. Further and mainly, the paper concentrates on the analysis of the single banking resolution and its supporting legislation in the form of the Bank Recovery and Resolution Directive (BRRD). The BRRD's main innovation, the "bail-in" principle of resolving failing banks is assessed, both in terms of clear advantages as compared to the classic public bailout, and of potential drawbacks, especially concerning the contagious effects and adverse impact on specific groups of creditors with political repercussions. The European bail-in is also compared to the US "Dodd-Frank Act solution", yet there has not been found any straight forward inspiration for the European scheme. Finally, the need for a common fiscal backstop is identified given the resource inadequacy of the current single resolution fund, especially if a major systemic crisis occurs. Thus, various arrangements of the fiscal backstop are proposed; it is argued that the European Stability Mechanism would serve the backstop purpose better than the options involving national budgets.