Journal of Applied Finance & Banking

National State Aid within the Banking Union (BU) and the Hard Core: Periphery Financial Divide

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• Abstract

  Direct government intervention in the form of State Aid to the banking sector has emerged as a core theme in the recent crisis. The BU current structural design, leaving actual and potential government intervention largely unattached, may actually enhance moral hazard, negative cross-border externalities and financial fragmentation between the hard core and the periphery Member States. Borrowing costs (i.e. interest rates) would be influenced by a bank’s location rather than by the ECB’s monetary policy, eventually rendering the system unsustainable. The EDIS proposal highlights the issue of State Aid and the role of national involvement in the banking sector. Efficient supervision, elimination of national State Aid and effective backstops to the ERF and EDIS are the appropriate policies to eradicate hard core - periphery divide and preserve the integrity of the euro.