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This paper analyses the stabilising properties of a European Banking Union in case of financial shocks in the euro area. We compare output losses under national interventions (‘bail-out’) with resolution mechanisms included in the banking union, namely resolution via the euro area’s Single Resolution Mechanism (SRM),‘bail-in’, and a backstop solution with the new European Stability Mechanism’s direct recapitalisation instrument for euro area banks. The paper evaluates by how much the output loss associated with the recent financial crisis in the euro area periphery and core could have been reduced had the banking union been in place at the time. The paper finds that with a banking union, GDP losses in the periphery could have been reduced by 30%-40% in the periphery and by 10%-40% in the euro area as whole, depending on which resolution mechanisms were in place. The paper discusses in detail how the individual resolution mechanisms affect the core and the periphery. The SRM is the most powerful for stabilising the periphery but is costly for the core. The ‘bail-in’ and the ESM backstop arrangements stabilise the periphery less but reduce GDP losses for the core. However, the direct recapitalisation instrument is only applicable under specific circumstances as a measure of ‘last resort’.
