The bank’s risk insurance and the EMU

Abstract

Banks provide insurance against interest rate shocks and real shocks. After the introduction of the common currency the credit system tends to take more of the risk of the private sector, reducing the overall risk of the economy and increasing the risk sharing among different countries and regions. The increased diversification that the introduction of the Euro has allowed, has increased the smoothing of interest rate shocks, but it has increased the incentive to smooth real shocks unevenly. The integration of the credit system, where the authority to regulate national banking system is transferred to the ECB, would change in a relevant way the reaction of the banking system to shocks. The model shows that asymmetries in the transmission of monetary policy would be reduced. On the other hand, a common market for banking activities might tend to amplify the asymmetric impact of real shocks.