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Managing Risk in the Financial System

Managing Risk in the Financial System

Edited by John Raymond LaBrosse, Rodrigo Olivares-Caminal and Dalvinder Singh

Managing Risk in the Financial System makes important and timely contributions to our knowledge and understanding of banking law, financial institution restructuring and related considerations, through the production of an innovative, international and interdisciplinary set of contributions which link together the law and policy issues surrounding systemic risk and crisis management.

Chapter 18: Creating an EU-Level Supervisor for Cross-border Banking Groups: Issues Raised by the US Experience with Dual Banking

Larry D. Wall, María J. Nieto and David G. Mayes

Subjects: economics and finance, financial economics and regulation, money and banking, law - academic, finance and banking law


* Larry D. Wall, María J. Nieto and David G. Mayes 18.1. INTRODUCTION AND MOTIVATION The European Union (EU) has been facilitating the growth of cross-border banking groups with considerable success, but bank supervision remains the responsibility of national supervisors. The difficulties this poses have been vividly highlighted by the problems encountered in the present crisis that have increased moral hazard. The conundrum has long been recognized and various proposals have been offered to address this weakness, ranging from full centralization of prudential supervision,1 to strengthened cooperation via colleges of supervisors and resolution authorities.2 An alternative that would retain the most important advantages of full centralization is that of centralization of chartering and supervision only for those cross-border groups that are systemically important to the EU. All other banks would retain national chartering and supervision. In many respects this would be similar to the arrangements in the US where there are federal and state charters. Decressin and Čihák,3 also consider a system with both an EU charter and a national charter. However, they leave open the question of the structure of the prudential supervisor including the possibility that EU chartered banks would be supervised by national authorities. A key part of their proposed framework would be freedom of choice for banks between national and European charters. In the authors’ view, this would deliver a prudential level playing field (all banks would have the choice) and allow market forces to play a role in determining the optimal mixture...

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