Regulating cross-border banks in Europe: a comment on the de Larosiere report and a modest proposal

Abstract

Current banking regulation does not fully support the crucial role of cross-border banks in financial market integration, particularly with respect to retail banking, which is considered the less integrated financial sector. Cross-border banks contribute to the integration of this market segment by extending their services beyond national boundaries through branches and/or subsidiaries. Supervision, however, is fragmented at national level and regulation imposes additional regulatory costs on subsidiary structures, hindering the most efficient allocation of resources through the internal capital market of the banking group.The current regulatory framework is based on cooperation and information exchange between national supervisors. Memoranda of Understanding and colleges, however, have proved insufficient, especially in the case of crisis management of cross-border institutions. Obstacles to asset transferability between group entities do not allow for fully consolidated supervision, centralized compliance and risk management of cross-border banking groups.The de Larosie`re Report and the Turner Review partially address such problems, suggesting a reform of the current European supervisory architecture. Both proposals assign macro-prudential supervision and supervisory standard setting to newly established European Authorities, while micro-prudential supervision would remain with national authorities and colleges of supervisors. The de Larosiere Report also proposes the coordination of colleges by a European Authority responsible for micro-prudential supervision, which would enact binding mediation and, eventually, overruling.The new supervisory architecture would benefit from a more harmonized European regulatory framework for cross-border banks, which would ease the coordination activities of supervisory colleges and the setting of common standards by the European Authority. An EC regulation on banking groups would set conditions for the recognition of the parent company’s management powers over the whole group, including asset transferability. As a result, branch and subsidiary structures would converge and become relatively fungible. Such regulation would also define ex ante rules on deposit insurance and lender of last resort, providing for a clear allocation of responsibilities, thus avoiding regulatory arbitrage and reducing systemic risk.