The death of the European Banking Union

This was the title of a note by Louis Rouanet published on 03 July 2017 as Mises Wire on mises.org. He argued that the bail out of two Italian banks, Veneto Banca and Banca Popolare di Vicenza, in June 2017 by the Italian government gave the deathblow to the European Banking Union, which become effective in November 2014 with the launch of the Single Supervisory Mechanism. In this note I will show that he was right as the correlation between risk premia for sovereigns and banks has sharply increased since then to the high levels observed before the start of the Banking Union. It was exactly this “disastrous sovereign-banking nexus, in which shaky bank balance sheets degrade the solvency of their sovereigns, and vice versa”, that the Banking Union was aiming to sever (Weidmann, 2013).  The budget plans of the new Italian government therefore have the potential to trigger a new financial crisis.