When the bank crisis finally reached its peak in the United States in mid September 2008, not only was the USA involved in this crisis but Europe also. Many of the European governments have had to intervene with the tax payers’ money in order to avoid a bank failure. How did these negative cross-border effects come about?
The massive deregulation of the banking system during the last 20 years led to an extreme enlargement of the banking system (Dermine, 2005) and large-scale cross-border mergers have become a trend. (Gulde/ Wolf, 2005). Also, due to the process of globalization, integration of the banking system has become more and more important. Therefore, correct banking regulation and supervision is all the more relevant.
There are three main components of a bank regulatory arrangement: deposit insurance, supervision and Lender of Last Resort. In Europe, an approach of partial harmonization has been adopted, based on three main principles: harmonization of minimum standards, home-country control and mutual recognition. (Kahn and Santos, 2002, 4). Therefore, financial supervision in Europe remains very fragmented, at a country level. Any explicit reference regarding the assignment of European responsibilites, “who takes care of financial stability in Europe”, is still absent. (Die Giorgio, Di Noia, 2001,4).
Table of Contents
I. Introduction
II. National Regulation and Supervision
II.1 Consideration of the current system
II. 2 Home Country regulation, more and more insufficient
II.3 More Host Country control?
II.4 Disadvantages of the Host country approach
II. 5 Discussion of national regulation
III. Supervision and regulation on the European level
III.1 Discussion of European regulation
III. 2 Separation of Monetary Policy and Bank Supervision
III. 3 Combination of Monetary Policy and Bank Supervision
III. 4 Discussion of bank regulation and supervision: separation or combination
IV The European solution
V Conclusion
Research Objectives and Key Topics
This paper examines the optimal structure for banking regulation and supervision in Europe, specifically addressing whether a centralized European authority is required to manage systemic risks. It explores the shortcomings of the current national-level approach and debates whether banking supervision should be combined with or separated from monetary policy to ensure financial stability.
- Evolution of European banking integration and the move towards branch banking.
- Limitations of home-country control in the context of multinational banks.
- Pros and cons of separating monetary policy from banking supervision.
- The potential benefits of a centralized European regulatory entity.
- Integration of banking supervision as a pillar for future European financial stability.
Excerpt from the Book
II. 2 Home Country regulation, more and more insufficient
There are two large drawbacks of home country control. First, it is too difficult for small countries to bear the cost of a bail-out from a large multinational bank. Second, cross-border spillover effects occur (Dermine, 2005). If a bank is forced into insolvency, it will negatively affect other countries. Sharing the bailing-out costs between different countries will be very difficult because of the multiple conflicts of interest relating to the procedures of bank foreclosure (Schoenmaker and Oosterloo, 2004). These conflicts can hamper the cross-border exchange of information between regulators. However, the EU finance ministers, regulators and central bankers have agreed on a Memorandum of Understanding, which facilitates the exchange of information during any crisis (Dermine, 2005). Nevertheless, home country control is insufficient in the future (Dermine, 2005). After all, there are more and more multinational banks which can not be regulated and supervised by only the home country.
Summary of Chapters
I. Introduction: This chapter highlights the impact of the banking crisis on Europe and outlines the necessity of reviewing the current fragmented regulatory landscape.
II. National Regulation and Supervision: This section details the existing home-country control model, analyzing its drawbacks and the limitations of potential host-country alternatives.
III. Supervision and regulation on the European level: This chapter argues for an EU-wide regulatory entity and debates the advantages of combining or separating monetary policy from supervisory functions.
IV The European solution: This chapter discusses the practical steps towards a pan-European approach, emphasizing the importance of political will and unity in creating a common supervisory authority.
V Conclusion: The paper concludes that a European-level authority is the optimal solution for managing the realities of modern, integrated financial markets.
Keywords
Banking Regulation, Financial Supervision, Home-Country Control, European Union, Monetary Policy, Systemic Stability, Bank Crisis, Financial Integration, Cross-border Merger, Lender of Last Resort, Deposit Insurance, Basel II, Societas Europaea, Banking Integration, Financial Stability.
Frequently Asked Questions
What is the core subject of this paper?
The paper evaluates the current state of banking regulation and supervision in Europe and argues for a shift towards a centralized European regulatory model to effectively manage financial crises.
What are the primary thematic areas covered?
Key areas include the limitations of national-level regulation, the coordination between host and home countries, and the institutional relationship between monetary policy and banking supervision.
What is the main research question of the work?
The central question is: Who should be in charge of European banking regulation and supervision, and how should this oversight be structured to ensure long-term stability?
Which scientific method is utilized in the analysis?
The work employs a qualitative analysis of existing economic literature and institutional frameworks, specifically reviewing studies by authors such as Dermine, Goodhart, Schoenmaker, Gulde, and Wolf to evaluate regulatory performance.
What topics are discussed in the main body of the paper?
The main body examines the failures of national home-country control, compares different regulatory structures, and evaluates the arguments for combining or separating banking supervision from central bank monetary functions.
Which keywords best characterize this work?
The most relevant keywords include Banking Regulation, European Integration, Financial Supervision, Monetary Policy, and Systemic Stability.
What are the primary drawbacks of the current home-country control model?
The paper notes that small countries struggle to fund bail-outs for large multinational banks, and that national regulators often prioritize domestic interests over regional stability, leading to inefficient information sharing.
Why might a combined system of supervision and monetary policy be preferable?
A combined system is argued to be more effective in managing systemic risk, as the central bank is often involved in bank rescues anyway, and a unified authority can better align macro-monetary goals with supervisory oversight.
Does the author recommend a specific solution for Europe?
Yes, the author advocates for the establishment of a centralized European entity that oversees both banking regulation and supervision, working in close cooperation with central banks to prevent systemic crises.
- Citation du texte
- Dipl. Jonathan Lecot (Auteur), 2009, Bankingregulation and Supervision in Europe - Who should be in charge?, Munich, GRIN Verlag, https://www.grin.com/document/153728
