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Banking Supervision in Integrated Financial Markets: Implications for the EU

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  • Stéphanie Stolz

Abstract

I analyze the optimal design of banking supervision in the presence of cross-border lending. Cross-border lending could imply that an individual bank failure in one country could trigger negative spillover effects in another country. Such cross-border contagion effects could turn out to be important in the EU because national banking problems could easily spread via the highly integrated interbank market. I show that if benevolent supervisors are accountable only to their own jurisdiction, they will not take cross-border contagion effects into account. Supervisors with such a national mandate fail to implement the optimum from a supranational perspective. In consequence, the probability of a bank failure will be inefficiently high. Against the background of this result, I argue in favor of institutionalizing an EU ”Supervisory Coordination Authority” to which national supervisors are accountable.

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Bibliographic Info

Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 812.

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Date of creation: 2002
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Handle: RePEc:ces:ceswps:_812

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Keywords: banking supervision; systemic risk; cross-border contagion;

References

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  1. Holthausen, Cornelia & Rønde, Thomas, 2004. "Cooperation in international banking supervision," Working Paper Series, European Central Bank 0316, European Central Bank.
  2. Joseph G. Haubrich, 1996. "Combining bank supervision and monetary policy," Economic Commentary, Federal Reserve Bank of Cleveland, Federal Reserve Bank of Cleveland, issue Nov.
  3. Giammarino, R.M. & Sappington, D.E.M., 1990. "An Incentive Approach to Banking Regulation," Papers, California Davis - Institute of Governmental Affairs 367, California Davis - Institute of Governmental Affairs.
  4. Rochet, Jean-Charles, 1992. "Capital requirements and the behaviour of commercial banks," European Economic Review, Elsevier, Elsevier, vol. 36(5), pages 1137-1170, June.
  5. Javier Santillán & Marc Bayle & Christian Thygesen, 2000. "The impact of the euro on money and bond markets," Occasional Paper Series 1, European Central Bank.
  6. Martin Summer, 2002. "Banking Regulation and Systemic Risk," Working Papers, Oesterreichische Nationalbank (Austrian Central Bank) 57, Oesterreichische Nationalbank (Austrian Central Bank).
  7. Charles Goodhart, 2000. "The Organisational Structure of Banking Supervision," FMG Special Papers, Financial Markets Group sp127, Financial Markets Group.
  8. Jean Tirole & Jean-Jaques Laffont, 1985. "Using Cost Observation to Regulate Firms," Working papers, Massachusetts Institute of Technology (MIT), Department of Economics 368, Massachusetts Institute of Technology (MIT), Department of Economics.
  9. Michael Taylor & Marc Quintyn, 2002. "Regulatory and Supervisory Independence and Financial Stability," IMF Working Papers, International Monetary Fund 02/46, International Monetary Fund.
  10. Working Group of the Economic and Financial Committee, 2000. "Report on financial stability," European Economy - Economic Papers, Directorate General Economic and Monetary Affairs (DG ECFIN), European Commission 143, Directorate General Economic and Monetary Affairs (DG ECFIN), European Commission.
  11. Dirk Schoenmaker, 1992. "Institutional Separation between Supervisory and Monetary Agencies," FMG Special Papers, Financial Markets Group sp52, Financial Markets Group.
  12. A. W. Coats, 1995. "Comment," History of Political Economy, Duke University Press, Duke University Press, vol. 27(5), pages 157-161, Supplemen.
  13. Giorgio Di Giorgio & Carmine Di Noia, 2001. "Financial Regulation and Supervision in the Euro Area: A Four-Peak Proposal," Center for Financial Institutions Working Papers, Wharton School Center for Financial Institutions, University of Pennsylvania 01-02, Wharton School Center for Financial Institutions, University of Pennsylvania.
  14. Speyer, Bernhard, 2001. "Internationalisation of banking and banking supervision," Research Notes, Deutsche Bank Research 01-7, Deutsche Bank Research.
  15. Jensen, Michael C. & Meckling, William H., 1976. "Theory of the firm: Managerial behavior, agency costs and ownership structure," Journal of Financial Economics, Elsevier, Elsevier, vol. 3(4), pages 305-360, October.
  16. Joe Peek & Eric S. Rosengren & Geoffrey M. B. Tootell, 1999. "Is Bank Supervision Central To Central Banking?," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 114(2), pages 629-653, May.
  17. Goodhart, Charles & Schoenmaker, Dirk, 1995. "Should the Functions of Monetary Policy and Banking Supervision Be Separated?," Oxford Economic Papers, Oxford University Press, vol. 47(4), pages 539-60, October.
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Citations

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Cited by:
  1. Philipp Paulus, 2006. "Brüssel, Frankfurt oder Basel - Wo muss das Problem steigender Staatsschulden in der Europäischen Währungsunion gelöst werden?," Otto-Wolff-Institut Discussion Paper Series, Otto-Wolff-Institut für Wirtschaftsordnung, Köln, Deutschland 01/2006, Otto-Wolff-Institut für Wirtschaftsordnung, Köln, Deutschland.
  2. Schüler, Martin, 2003. "Incentive Problems in Banking Supervision: The European Case," ZEW Discussion Papers, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research 03-62, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
  3. Naďa Blahová, 2010. "The Changes within the Regulatory and Supervisory Framework of the European Union Financial Markets," Český finanční a účetní časopis, University of Economics, Prague, University of Economics, Prague, vol. 2010(2), pages 42-51.

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