Regulatory Differences in European Banking: Implications for Cross-Border Banking and Financial Stability

Since the introduction of the euro there has been a common monetary policy in Europe. In contrast, banks, and more generally financial markets and institutions, are largely subject to national supervision. Moreover, in the financial market sector there still exist significant regulatory differences between the EU member states. This diversity of regulations is the result of differences in legislation and administrative implementation. Owing to the enlargement of the EU to now 25 member states the relevance of potential differences in the regulation and supervision of banks has increased even more. Furthermore, the qualitative approach of Basle II has translated into rather more leeway for the respective nations regarding the implementation of equity capital guidelines. This could despite improved measures regarding risk assessment further aggravate regulatory differences.

The objective of the study is to investigate the impact of differences in regulation and supervision on bank behaviour (e.g. regulation arbitrage), the integration of the financial markets in the EU, and the stability of the banking system. In the first part of the research project, the extent of regulatory differences in the EU is measured and evaluated. Based on the findings in this part, the consequences of regulatory differences for financial market integration and stability are investigated in the two subsequent empirical parts. In the first empirical part, the consequences of regulatory differences for the integration of the financial markets are addressed. Thereby particular attention is put on the different channels of integration. In the second empirical part, the impact of differences in regulation and supervision on the stability of the banking market in the EU is analysed. Based on the results of the two empirical parts, the final part of the research project draws conclusions about the future development of the European regulatory and supervisory framework.

Papers: International Banking and the Allocation of Risk (C. Buch, G. DeLong, and K. Neugebauer). City University of New York (CUNY), University of Tübingen, and Institute for Applied Economic Research. Mimeo.