This paper studies the welfare effects of a “partial banking union” in which cross-country transfers for bailouts are set at the supranational level , but policymakers in member countries decide the distribution of funds. This allows the self-interested policymakers to extract rents in the bailout process. In equilibrium, such a banking union can actually lower the welfare of citizens in the country receiving transfers com-pared to the autarky case, as the receiving country must increase its share of the overall burden of the bailout, in order to compensate for the rent-seeking distortion. Supranational fiscal rules are ineffective at reversing this result.
