VoxEU: Cross-border banking and national supervision – is there a conflict?

07 January 2012

This column explores whether a supranational financial supervisor might be able to alleviate the pressures on national regulators and governments, particularly in Europe, and what barriers lie in the way.

In their column, Thorsten Beck, Radomir Todorov and Wolf Wagner write that the recent crisis has led to a considerable number of interventions in, and resolutions of, failing banks, and we can expect many more in the coming months as the eurozone crisis in particular continues to undermine bank fragility. The discrepancy between the geographic perimeter of banks – especially large banks’ activities – and regulators’ perimeters has added a further layer of complication, and some have called for a eurozone-level banking regulation and resolution regime.

What about supranational supervision?

Can a supranational supervisor improve on the current network of national supervisors in Europe? When domestic and efficient intervention thresholds differ, a supranational supervisor could, in principle, always increase welfare because this supervisor would also take into account the effects that materialise outside of the country in question. However, supranational supervision might itself also be subject to imperfections.

• First, a supranational supervisor, even having the correct incentives, can make wrong decisions if she has less perfect knowledge of the success probability than national supervisors.
• Second, the global supervisor may be less efficient in intervening, resulting in higher resolution costs. Such higher costs could arise from being farther away from the relevant market and thus being disadvantaged – relative to a national supervisor - in terms of arranging for a merger and acquisition or purchase and assumption operation.
• Third, intervening in and resolving a bank that is present in markets with different legal frameworks can result in extended and costly resolution, raising the external costs for the economies in question. There is, however, also a countervailing effect - a supranational supervisor might be in a better position to resolve a financial institution that dominates its home country when operating in a supranational banking market. This is because a national supervisor may not have the resources to resolve a bank that is large relative to the domestic economy.

Could European-level supervision work?

The comparison between national and supranational supervision has clear implications for the current debate on establishing a European-level failure resolution framework. To which we would add the following points:

• First, a supranational regime can only improve the failure resolution for banks whose mix of foreign deposits, assets, and equity is imbalanced and, hence, distorts the intervention decision by a national supervisor.
• Second, such a supranational framework also has to relate to the appropriate geographic area. The largest 25 European banks have, on average, 25 per cent of their assets in other European countries outside of their own. This share ranges, however, from 2 per cent in the case of BBVA (which has 31 per cent of assets outside Europe) to the Nordea Group, with 74 per cent of assets outside its home countries in other European countries (and no assets outside Europe). A European-level supervisor would not help to reduce distortions in the case of banks with a significant share of assets outside Europe.
• Third, such a regime can only improve on a purely national resolution framework if equipped with the necessary means and resources to resolve a bank efficiently.
• Fourth, resolution powers have to come with the necessary supervision and monitoring tools; a close relationship with national supervisors is therefore critical.

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