CESifo Working Paper No. 812
Banking Supervision in Integrated Financial
Markets: Implications for the EU
Abstract
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.
Keywords: banking supervision, systemic risk, cross-border contagion.
JEL Classification: G21, G28.
Stéphanie Stolz
Kiel Institute for World Economics
Düsternbrooker Weg 120
24105 Kiel
Germany