Abstract:
Europe's banks have long been slow to integrate across borders, but this is changing fast. 'Pan-European banks', with activities spanning several EU countries, are emerging rapidly and are likely to enhance the overall contribution of financial services to economic growth. However, financial stability arrangements, notably banking supervision, remain nationally anchored. This creates significant risks in the event of a crisis involving a pan-European bank. Faulty cross-border coordination and diverging national views could seriously hamper the ability of the authorities to respond speedily and effectively to an unfolding financial crisis. Recent turmoil in credit markets underscores the importance of proper management of financial crises. The emergence of pan-European banks requires reform of Europe's financial stability arrangements, in which the guiding principle should be the minimisation of potential collective crisis costs to Europeans. Important elements of the financial stability framework can no longer best be organised through voluntary coordination among national authorities. A two-tier framework, including new EU-level arrangements and institutions focused on pan-European banks, would address this situation while remaining consistent with the subsidiarity principle. Given the significant technical and political obstacles, strong commitment at the highest level will be required to make meaningful progress.