Unexpected benefits of the Banking Union
Progress has been made argue Farnè and Vouldis in unexpected ways. They look at a dataset of 270 banks operating in the euro area and examine how banks’ credit risk evolved starting for the period of 2014 until 2019. The period is significant because it was in 2014 that the Single Supervisory Mechanism (SSM) was established and put the ’Significant institutions’ of the participating member states under the supervision of the ECB. In addition, data on non-performing-loans (NPLs) was harmonized across countries, following common risk and solvency definitions, thus facilitating a cross-country analysis like the one the authors are conducting. They find:
Overall, our results show that, in the aftermath of the euro area financial crisis and the setting up of a supranational supervisor, banks’ size is negatively related to risk-taking. On average, larger banks tend to reduce their NPL ratios more compared to smaller banks after controlling for other country- and bank-specific factors. A supranational supervisor seems to be effective in reducing banks’ risk-taking due to enhanced organisational capacity rather than through incentive alignment of banks with the supervisors.
Banks’ risk-taking within a banking union
Authors: Matteo Farnè, Angelos Vouldis
From: ECB
