Regional Integration and Financial Regulation

In the aftermath of the global financial and economic crisis, Europe and the United States are taking the lead in revamping the financial regulatory and supervisory framework. In this paper, we focus on the recent changes in the financial regulatory and supervisory framework in the European Union (EU) where regional integration is most advanced, to draw implications for the rest of the world. The EU established the European Banking Union (EBU) with a single regulatory and supervisory system, necessary from the point of view of macro-prudence. At the same time, the EU is embarking on structural reform of the banking sector, as well as the Capital Markets Union, in order to improve the workings of the EBU and the Single Market. These reforms are making progress through conflict and compromise between member states and the European Institutions. Reform within the framework of regional integration has three advantages. First, when the interests of financial institutions and tax payers collide, democracy can be made to function better if supra-national institutions and national institutions represent the interests of the opposing entities. Second, the existence of many supra-national institutions can maintain the momentum and balance of reform. Third, transfer of sovereign power to a supra-national institution can help the implementation of desirable policy.