Financial Supervision in an Integrating Europe: Measuring Cross-Border Externalities
Against the backdrop of an integrating Europe, the debate on the need for European arrangements for financial supervision and stability is intensifying in the literature as well as in the policy arena. While there is a consensus that the need for European arrangements ultimately depends on the intensity of cross-border spill-over effects or externalities within the EU, there has been no attempt to measure these cross-border externalities. The aim of this paper is to fill this gap. A new data-set on cross-border penetration (as a proxy for cross-border externalities) of large banking groups is collected. It is found that cross-border penetration within the EU is currently limited: only seven banks out of the sample of 30 large EU banking groups are considered to be ‘European’ banks that have the potential to pose significant cross-border externalities. However, aggregate data show a gradual, though statistically significant, increase of cross-border penetration in the EU. Policy-makers may thus in the (near) future face the challenge of designing European structures for financial supervision and stability.
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