Incentive Compatible Relationship between the ERM II and Close Cooperation in the Banking Union: The Cases of Bulgaria and Croatia

34 Pages Posted: 9 Jul 2021

See all articles by Maria Nieto

Maria Nieto

Banco de España

Dalvinder Singh

University of Warwick - School of Law

Date Written: July 8, 2021

Abstract

The goal of expanding participation in the European Banking Union was to allow the “outs” to enter into close cooperation, but it did not include the simultaneous joining of the Exchange Rate Mechanism (ERM II). Focusing on the cases of Bulgaria and Croatia, this paper attempts to respond to various questions. What is the rationale behind the double requirement of having simultaneously to apply to become a member of the ERM II and to prepare to become a member of the Banking Union via the rule-based “close-cooperation” coordination mechanism between the EU non-euro-area national competent authorities (NCAs) and the European Central Bank (ECB)? Does the integration of close-cooperation countries’ banking systems with the euro-area banking systems support the decision to join the ERM II and “opting in” to the Single Supervisory Mechanism (SSM)? What are the advantages of preparing to become a full member of the euro area and the SSM? It is evident from the research undertaken in this paper that there are clear benefits of close cooperation for these member states whose domestic currencies are already linked to the euro, in view of the dominant position eurozone banks have in their respective domestic markets. It is more difficult for a national central bank or NCA to exercise discretion in implementing ECB decisions once it is committed to the path leading to full European Monetary Union (EMU) membership. Hence the commitment to join the EMU minimises the authority risk for the ECB as well as for the Single Resolution Board, as safeguards become non-significant and termination is not an issue. The uncertainty about the functioning and durability of the close-cooperation arrangement is largely removed.

Keywords: banking union, close cooperation, ERM II

JEL Classification: E02, E44, F15, G15, G21, H12, K23

Suggested Citation

Nieto, Maria J. and Singh, Dalvinder, Incentive Compatible Relationship between the ERM II and Close Cooperation in the Banking Union: The Cases of Bulgaria and Croatia (July 8, 2021). Banco de Espana Occasional Paper No. 2117, Available at SSRN: https://ssrn.com/abstract=3882611 or http://dx.doi.org/10.2139/ssrn.3882611

Maria J. Nieto (Contact Author)

Banco de España ( email )

Alcala 50
Madrid 28014
Spain

Dalvinder Singh

University of Warwick - School of Law ( email )

Gibbet Hill Road
Coventry CV4 7AL, CV4 7AL
United Kingdom
024 76150675 (Phone)
024 76524104 (Fax)

HOME PAGE: http://www2.warwick.ac.uk/fac/soc/law/staff/academic/dalvinder

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