Cross-Border Banking in the Expanded European Union

Cross-border banking directed toward the new member states (NMS) of the European Union has grown substantially in the last ten years. Aligning politically and economically with the rest of Europe through membership in the European Union and the Economic and Monetary Union (EMU) has played an important role in this expansion. The channels through which the creation of the euro led to increased cross-border banking among the original members of the EMU help but do not fully explain the increased flow of cross-border banking from the EMU to the NMS. This indicates that for the NMS, joining the European Union and eventually the EMU changes the perceptions of EMU banks regarding the benefits of expanding. The improved perception leads to almost an immediate expansion of banking from the EMU at a rate that is higher than it would be if only pure market effects were taken into account.