Andreas Haufler provides a theoretical explanation of why supervision is easier to centralise in a banking union than bailout decisions in “Regulatory and Bailout
Decisions in a Banking Union”. Specifically, in a two-country model with different failure probabilities for banks centralized supervisory decisions will always be efficiency enhancing, as the two countries share a common interest to internalize
the cross-border spillovers that arise from both successful and defaulting banks. In contrast, the overall efficiency effects of centralized bailout decision are ambiguous, as centralized bailouts reduce the total costs that arise from failing banks, but also
exacerbate banks’ incentives to choose inefficiently high levels of risk-taking. In addition, with cross-country differences in the distribution of failure probabilities, a conflict of interest will necessarily emerge from an equal sharing of all countries
in the costs of bank bailouts. For a simple calibration with foreign ownership shares and rates of returns collected from a sample of large European bank, the author shows that the equilibrium regime will feature a common regulatory policy, but maintain
national bailout policies, i.e., exactly what we can currently observe in the European banking union structure.