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Are banking and capital markets union complements? Evidence from channels of risk sharing in the eurozone


Hoffmann, Mathias; Maslov, Egor; Sørensen, Bent E; Stewen, Iryna (2018). Are banking and capital markets union complements? Evidence from channels of risk sharing in the eurozone. Working paper series / Department of Economics 311, University of Zurich.

Abstract

EMU was a major step towards deeper financial integration among member states. However, diversification of equity portfolios remained limited while banking integration surged. We argue that the nature of banking integration is of first-order importance for understanding the patterns and channels of risk sharing. While EMU was associated with the creation of an integrated interbank market, as witnessed by an explosion in cross-border interbank flows, “real” banking integration (in terms of cross-border bank-to-real sector flows or banking-consolidation) remained limited. But we find that real banking integration is associated with more risk sharing, while indirect integration via interbank flows is not. Further, indirect banking 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 that allows us to explain these patterns in the data, 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.

Abstract

EMU was a major step towards deeper financial integration among member states. However, diversification of equity portfolios remained limited while banking integration surged. We argue that the nature of banking integration is of first-order importance for understanding the patterns and channels of risk sharing. While EMU was associated with the creation of an integrated interbank market, as witnessed by an explosion in cross-border interbank flows, “real” banking integration (in terms of cross-border bank-to-real sector flows or banking-consolidation) remained limited. But we find that real banking integration is associated with more risk sharing, while indirect integration via interbank flows is not. Further, indirect banking 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 that allows us to explain these patterns in the data, 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.

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Additional indexing

Item Type:Working Paper
Communities & Collections:03 Faculty of Economics > Department of Economics
Working Paper Series > Department of Economics
Dewey Decimal Classification:330 Economics
Language:English
Date:December 2018
Deposited On:18 Jan 2019 11:52
Last Modified:25 Sep 2019 00:06
Series Name:Working paper series / Department of Economics
Number of Pages:23
ISSN:1664-7041
Additional Information:Beitrag an der Konferenz "The Euro at 20", Dublin, Irland, 25.-26. Juni 2018. Dieses Working Paper ist auch erschienen als CEPR Discussion Paper DP13254, siehe https://cepr.org/active/publications/discussion_papers/dp.php?dpno=13254. Später im IMF Economic Review erschienen (siehe https://www.zora.uzh.ch/id/eprint/173421/).
OA Status:Green
Official URL:http://www.econ.uzh.ch/static/workingpapers.php?id=990
Related URLs:https://cepr.org/active/publications/discussion_papers/dp.php?dpno=13254
https://www.zora.uzh.ch/id/eprint/173421/

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