Financial Supervision in an Integrating Europe: Measuring Cross-Border Externalities

Against the backdrop of European integration, the debate on the need for European arrangements for financial supervision and stability is intensifying in the literature as well as in the policy arena. While there is a consensus that the need for European arrangements ultimately depends on the intensity of cross-border spillover effects or externalities within the European Union (EU), there has been no attempt to measure these cross-border externalities. The aim of this paper is to fill this gap. A new data set on cross-border penetration (as a proxy for cross-border externalities) of 30 large EU banking groups has been collected. Although a home country bias still exists, the data indicate that the number of groups that have the potential to pose significant cross-border externalities within the EU context is substantial and increasing. Within a four-year period (2000-03), we find a statistically significant upward trend of emerging European banking groups. Policymakers therefore face the challenge of designing European structures for financial supervision and stability to deal effectively with these emerging European banking groups. Copyright Blackwell Publishing Ltd. 2005