Nationally Fragmented Supervision Over Multinational Banks as a Source of Global Systemic Risk: A Critical Analysis of Recent EU Reforms

RETHINKING FINANCIAL REGULATION AND SUPERVISION IN TIMES OF CRISIS, G.Ferrarini, K.J.Hopt and E.Wymeersch, eds., Oxford University Press, Forthcoming

Posted: 8 Sep 2011 Last revised: 26 Mar 2012

Guido Ferrarini

University of Genoa - Law Department and Centre for Law and Finance; European Corporate Governance Institute (ECGI)

Filippo Chiodini

Università degli Studi di Genova - Law School

Date Written: March 2012

Abstract

The European single market supported the creation of multinational banking groups. However, the European banking directives and the single license system were built along the model of the stand-alone bank and cannot keep pace with recent market developments. The national character of prudential supervision determines at least three sets of negative consequences for cross-border banking groups: higher compliance and enforcement costs; national solutions rather than cross-border cooperation between supervisors; greater systemic risks as a consequence of coordination failures. In this paper we argue that there is a strong case for further centralization of supervision and crisis management. Recent reforms in Europe, including the creation of a European Banking Authority, move in the right direction, but they still rely too heavily on cooperation between national authorities. While (enhanced) coordination may be effective in normal times, in emergency situations national authorities tend to behave strategically and exploit information asymmetries. As shown by the recent crisis, misalignment of incentives can lead them to national bias and non-cooperative dominant strategies. We argue that early intervention measures and crisis resolution tools should be reserved to a pan-European authority. Also ongoing supervision should be centralized, so as to avoid an inefficient transfer of powers to a single resolution authority at the outset of a crisis.

Keywords: multinational banks, banking regulation, banking supervision, systemic risk, European banking, financial crisis, supervisory cooperation, lead supervisor, consolidating supervisor, centralized supervision, regulatory harmonization, internal market

JEL Classification: F02, F23, F36, G15, G18, G34, G38, K22, N20, O16, O19

Suggested Citation

Ferrarini, Guido and Chiodini, Filippo, Nationally Fragmented Supervision Over Multinational Banks as a Source of Global Systemic Risk: A Critical Analysis of Recent EU Reforms (March 2012). RETHINKING FINANCIAL REGULATION AND SUPERVISION IN TIMES OF CRISIS, G.Ferrarini, K.J.Hopt and E.Wymeersch, eds., Oxford University Press, Forthcoming. Available at SSRN: https://ssrn.com/abstract=1923756 or http://dx.doi.org/10.2139/ssrn.1923756

Guido Ferrarini (Contact Author)

University of Genoa - Law Department and Centre for Law and Finance ( email )

Via Balbi, 22
16126 Genova, 16100
Italy
+39 010 209 9894 (Phone)
+39 010 209 9890 (Fax)

HOME PAGE: http://www.clfge.org

European Corporate Governance Institute (ECGI)

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

HOME PAGE: http://www.ecgi.org

Filippo Chiodini

Università degli Studi di Genova - Law School ( email )

Via Balbi, 22
16126 Genova
Italy
+39 010 209 9893 (Phone)
+39 010 209 9890 (Fax)

Paper statistics

Abstract Views
833