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Banking Supervision in Integrated Financial Markets: Implications for the EU

  • Stéphanie Stolz

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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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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  1. Martin Summer, 2002. "Banking Regulation and Systemic Risk," Working Papers 57, Oesterreichische Nationalbank (Austrian Central Bank).
  2. Cornelia Holthausen & Thomas Rønde, 2003. "Cooperation in International Banking Supervision," CIE Discussion Papers 2004-02, University of Copenhagen. Department of Economics. Centre for Industrial Economics.
  3. Michael Taylor & Marc Quintyn, 2002. "Regulatory and Supervisory Independence and Financial Stability," IMF Working Papers 02/46, International Monetary Fund.
  4. Javier Santillán & Marc Bayle & Christian Thygesen, 2000. "The impact of the euro on money and bond markets," Occasional Paper Series 1, European Central Bank.
  5. Charles Goodhart, 2000. "The Organisational Structure of Banking Supervision," FMG Special Papers sp127, Financial Markets Group.
  6. Giammarino, Ronald M & Lewis, Tracy R & Sappington, David E M, 1993. " An Incentive Approach to Banking Regulation," Journal of Finance, American Finance Association, vol. 48(4), pages 1523-42, September.
  7. Working Group of the Economic and Financial Committee, 2000. "Report on financial stability," European Economy - Economic Papers 143, Directorate General Economic and Financial Affairs (DG ECFIN), European Commission.
  8. 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 01-02, Wharton School Center for Financial Institutions, University of Pennsylvania.
  9. Joseph G. Haubrich, 1996. "Combining bank supervision and monetary policy," Economic Commentary, Federal Reserve Bank of Cleveland, issue Nov.
  10. Dirk Schoenmaker, 1992. "Institutional Separation between Supervisory and Monetary Agencies," FMG Special Papers sp52, Financial Markets Group.
  11. Joe Peek & Eric S. Rosengren & Geoffrey M. B. Tootell, 1999. "Is bank supervision central to central banking?," Working Papers 99-7, Federal Reserve Bank of Boston.
  12. Jean Tirole & Jean-Jaques Laffont, 1985. "Using Cost Observation to Regulate Firms," Working papers 368, Massachusetts Institute of Technology (MIT), Department of Economics.
  13. Jensen, Michael C. & Meckling, William H., 1976. "Theory of the firm: Managerial behavior, agency costs and ownership structure," Journal of Financial Economics, Elsevier, vol. 3(4), pages 305-360, October.
  14. 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.
  15. Rochet, Jean-Charles, 1992. "Capital requirements and the behaviour of commercial banks," European Economic Review, Elsevier, vol. 36(5), pages 1137-1170, June.
  16. A. W. Coats, 1995. "Comment," History of Political Economy, Duke University Press, vol. 27(5), pages 157-161, Supplemen.
  17. Speyer, Bernhard, 2001. "Internationalisation of banking and banking supervision," Research Notes 01-7, Deutsche Bank Research.
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