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

[email protected]

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