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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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