Channels of Risk Sharing in the Eurozone: What Can Banking and Capital Market Union Achieve?

Mathias Hoffmann, Egor Maslov, Bent E. Sorensen, Iryna Stewen

    Research output: Contribution to journalArticle

    Abstract

    We study channels of risk sharing in the EMU before and after 2008, when the Great Recession started. Empirically, higher cross-border equity holdings and more direct bank-to-nonbank lending are associated with more risk sharing while interbank integration is not. Equity market integration in the EMU remains limited while banking integration is dominated by interbank integration. Further, interbank integration proved to be highly procyclical, which contributed to a freeze in risk sharing after 2008. Based on this evidence, and results from simulations of a stylized DSGE model, we discuss implications for banking union. Our results show that direct banking integration and capital market integration are complements and that robust risk sharing in the EMU requires integration on both fronts.
    Original languageEnglish
    Pages (from-to)443-495
    JournalIMF Economic Review
    Volume67
    Issue number3
    DOIs
    Publication statusPublished - 2019

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