The Liquidationist ‘Genie’ Within the Banking Union

Abstract

This paper argues that the Banking Union limited the ability of Euro Area banking systems to finance member states' fiscal and current account deficits and that it weakened financial stability and the 'irreversibility of the euro'. It increased bank capital requirements and tightened crisis response policy instruments, favoring bank resolutions or liquidations, while hindering bank bailouts, adopting an approach with some similarities to the liquidationist thesis of the 1930s. This framework had significant fiscal costs and redistributive effects, as it led to the application of resolution or liquidation measures to technically solvent or even adequately capitalized banks, sometimes contributing to bank runs.

Keywords: Resolution, liquidation, financial stability, Banking Union, liquidationist thesis

JEL Classification: E58, G00, G21, G28