Governance of International Banking: The Financial Trilemma (Chapter 1)

Abstract

The Global Financial Crisis has shown that the international financial system is vulnerable to breakdown. The financial trilemma demonstrates that financial stability, international banking and national financial supervision cannot be combined. National supervisors force international banks to keep local liquidity pools and capital buffers, which cannot be transferred. This national approach is a very costly solution to the trilemma. The book "Governance of International Banking" explores an alternative solution to keep international banking alive. The central element is an international coordinated approach to supervision and resolution of international banks. International financial institutions, like the Bank for International Settlements and the International Monetary Fund, should take on a supervisory role of global systemic banks, broadening their mission for monetary stability to one that includes monetary and financial stability. At the European level, the European Central Bank is currently assuming the financial stability mandate for the European banking system.

Keywords: Global Financial Crisis, Global Governance, International Finance, Financial Trilemma, Global Financial System, International Financial Regulation, G-SIBs, G-SIFIs, IMF, BIS, ECB, FSB, Banks, Systemic Risk

JEL Classification: E44, F33, F34, F55, F59, G1, G15, G2, N20, N40