Making the European banking union macroeconomically resilient

This study seeks to assess the resilience of the banking union framework created in recent year and, in particular, the potential costs that would be induced by different banking shocks, under various scenarios regarding the implementation of the Banking Union's resolution pillar. Based on a non-linear dynamic model, the potential costs to the euro area economy of a medium-sized financial shock are estimated at a cumulated loss of 1 trillion euro in GDP (approximately -9.4% of the 2016 forecast GDP), job losses amounting to 1.71 million and an increase in public debt of 51.4 billion euro in 2016. The most effective remedial would be to increase the banking sectors' equity ratio to 9% or more and to lower dividends, on the basis of the simulations in the model. This would make the economy more shock-resistant in the medium term. At the same time, the cost of implementing this increased equity ratio would be offset by the reduction in losses caused by a financial shock. In addition, an augmented Single Resolution Fund with more timely implementation would reduce the cost of a new crash, but would be insufficient to prevent turmoil in the euro area economy.