The document discusses proposals for reforming the European supervisory architecture for cross-border banking. It summarizes the de Larosiere Group's recommendations, which include establishing a European System of Banking Supervisors (ESBS) coordinated by the European Banking Authority (EBA). The ESBS would have national banking supervisors and colleges of supervisors for cross-border banks. The EBA would coordinate supervision and have final decision-making power. The proposals aim to address issues with the current fragmented national supervision approach and lack of coordination. They seek to enhance financial stability and provide a more level playing field for cross-border banks.

1. Discussion Paper
“Cross-border banking in Europe: what regulation and supervision?”
Draft Comment by: Kumar Pallav1
Banking Regulation and Supervision Seminar
Prof. Hertig
1
Candidate for LLM, class of 2010, NYU School of Law.
1

2. Synopsis
I. Introduction.....................................................................................................1-3
II. European Supervisory Architecture- A Revised Framework
A. Present European Supervisory Architecture (ESA) and need of proposal........5-8
B. Proposed European Supervisory Architecture (ESA)...........................................9
III. Potential solutions
A. European System of Banking Supervisors (ESBS).........................................9-13
B. New Regulation for Financial Groups ..........................................................13-17
C. Early Intervention Mechanism and Burden Sharing Issues...........................18-21
IV. Conclusion .......................................................................................................22
2

3. I. Introduction
Most financial institutions in the European Union (EU) are still based in one
country, but a number of large financial institutions have systemic cross-border
exposures. Specially, Cross-border banks are a European and global reality and
they are crucial in maintaining and developing financial and economic integration.
The recent crisis has shown that it is urgent to reform the European supervisory
architecture to recognize the international dimension of financial markets.2 It is
important to achieve a prudential level playing field for European banks, while
helping to remedy more rapidly problems presented by the national segmentation
of Europe’s financial stability framework. This segmentation stands in the way of
better supervision and optimization across borders of banks’ operations. The EBA
therefore aims at leveling the playing field for cross-border banking business –
which is essential to boost competition and productivity in Europe’s financial
services sector – and improving the cross-border supervision of large, complex
cross-border banking institutions.3
In October 2008, de Larosiere Group submitted its report4 on
implementation of a new European supervisory architecture, particularly with the
2
See Peter Praet, Overview of recent policy initiatives in response to the crisis, Journal of
Financial Stability 4, 368–375 (2008).
3
See Praet, P., Herzberg, V., Market liquidity and banking liquidity: linkages, vulnerabilities and
the role of disclosure, Banque de France. Fin. Sta. Rev. 11, 95–109 (2008).
4
See generally the High-Level Group on supervision on financial supervision in the EU,
http://ec.europa.eu/internal_market/finances/docs/de_larosiere_report_en.pdf
3

4. view that there is an urgent need to reform and harmonize the European financial
regulatory and supervisory framework. The cross- border banking perspective
adopted in this report brings useful insights into the broader and comprehensive
approach taken by the de Larosiere Group, whose mandate was to analyze financial
markets overall. This report includes various proposals to reform the European
supervisory architecture.5
In times of stressed financial conditions, the current banking institutional
framework in EU does not give due consideration to the cross-border externalities
and negative spillovers resulting from individual supervisory decisions. This paper
examines the implications that alternative regulatory structures may have for
resolving failed banking institutions. This report gives emphasis on the European
Union (EU), which is both economically and financially large and has several
features relating to cross-border banking. The present paper makes a first step
towards providing proposals for a new regulation for Multi National Banks
(MNBs) to define the responsibilities and powers of the parent company and
establish neutrality with respect to the organizational structure of the cross-border
group (branches vs. subsidiaries).
In this comment I intend to focus on the discussion paper by UniCreditGroup
and how their proposals advanced by the High Level Group chaired by Mr. de
Larosiere to move towards a European System of Banking Supervision which
would operate along the same lines, in terms of independence, governance and
mechanisms, as the present Eurosystem model. The goal of this comment will be to
5
See Penning Och. Valutapolitik, “Cross-border financial supervision in Europe: Goals and
transition paths,” 2, 58-89(2006).
4

5. support and contrast the views of the UniCreditGroup, specifically in the issue of
rapid creation of a European supervisory architecture.
II. European Supervisory Architecture- A Revised Framework
This paper analyze the emergence of an increasingly integrated financial market
in the EU which is indeed a major challenge for financial supervision – a challenge
which goes to the heart of the objective of supervision: integration increases
contagion risks, and thereby jeopardizes financial stability; integration makes it
more difficult to ensure a level playing-field if rules and supervisory practices
differ; integration means the development of large cross-border groups, which will
require more streamlined and cost-effective supervisory organization.6
A. Present European Supervisory Architecture (ESA) and need of proposal
At the current juncture, report reveal that the supervision of EU firms
remains largely based on national, home state supervision – but where cross border
firms have set up subsidiaries under local law. These subsidiaries are regulated
finally at host state level.7 Cross border branches of firms are regulated by the
home country, but safeguards have been provided in EU law for host state
6
See Giannetti, M., and S. Ongena, Financial Integration and Firm Performance: Evidence from
Foreign Bank Entry in Emerging Markets, Rev. Fin. 13, 181-223(2009).
7
See Garcia, Gillian G. H., and María J. Nieto, “Banking crisis management in the European
Union: Multiple regulators and resolution authorities,” J. Banking Reg., Vol. 6, No. 3, 206-
226(2005).
5

6. supervisors to act for example in emergency situations to protect depositors
(Article 33 CRD).8
In the case of investment services, host state supervisors have significant
areas of control - including the right to examine branch arrangements. Host
supervisors retain control of liquidity in branches as well and should be informed
of all relevant information about the group (Article 42 CRD and its recent
strengthening).
This organization is a very complex one, leading to multiple reporting lines
between supervisors and supervised entities and to complex mechanisms of
cooperation between home and host supervisors. Some argue that the present
arrangements should be preserved because, in certain cases, it could be better to
handle complex banking institutions with different supervisors holding different
views on a number of issues. However, such a view would have to be backed by a
precise and convincing analysis.9
Given the above, report suggests that the current supervisory arrangements
are not optimal to contribute to a high degree of financial stability in the Single
Market. Host Member States, in particular, largely depend on the effectiveness of
supervision carried-out in the home Member States. And one supervisory mistake
can have major consequences throughout the Single Market. The appropriateness
8
The Capital Requirement Directive 2006/48/EC (CRD).
9
Reviews of the benefits appear in Caprio et al. (2006), Committee on the Global Financial
System (2004), Goldberg (2007) and Soussa (2004). Brief previous warnings about the unsettled
state of affairs in cross-border banking appear in Goodhart (2005), Eisenbeis (2005), and Mayes
(2005). See in particular the analysis of the Nordea Bank, which is headquartered in Sweden but
operates in a number of other countries in the appendix to Mayes (2005).
6

7. of current arrangements also fails from an efficiency standpoint. In 2003, the
Sveriges Riksbank took the same observation and stated the affect due to failure of
the current arrangement that:
“… if a cross-border [branch bank] were to fail, it is improbable that
either politicians or authorities in the respective countries would be willing
to risk taxpayers’ money to guarantee stability in countries other than their
own. This could prompt the concerned countries to try to ring-fence the
bank’s assets in their own country with a view to minimizing the costs to the
domestic economy, or not to intervene at all in the hope that other countries
in which the bank has a bigger presence feel forced to act. The result could
be a suboptimal resolution of the crisis that proves more costly or that
produces greater adverse effects for all the countries involved.”
Currently, banking institutions operating in different markets have to cope with
different national supervisory rules and practices. They have to commit extensive
resources to deal with numerous supervisors and differing supervisory
requirements, for example in the area of reporting. This entails administrative costs
without any added value and mitigates the cross- border banking failures.10
Finally, one can question whether the current arrangements provide for a
level playing-field between banking institutions.11 Cross-border banking
10
See Cerutti, Dell’ Ariccia, and Peria, “How banks go abroad: Branches or Subsidiaries?” J.
Banking & Fin., vol.31, Issue 6, 1669 (2007); George Kaufman, “Banking Regulation &
Foreign-Owned Banks” (2004).
11
For the following discussion of the EBC see Cihak, M. and Decressin, J., ‘The case for a
European Banking Charter’ IMF Working Paper, 2007.
7

8. institutions have different home supervisors, depending on the Member State
where they have established their headquarters. These various supervisors may
have different views on major supervisory issues.
B. Proposed European Supervisory Architecture (ESA)
There are a range of views on how EU banking regulation and supervisory
structures should face up to the challenges of the 21st century. What’s more, these
opinions are not static, which makes for a complex situation. The de Larosiere
Group identified the relevant Basel Committee12 standards for microfinance
activities and develop additional guidance for micro prudential supervision.13 The
proposals advanced by the de Larosiere group provides a guidance, which is the
result of an analysis of the key issues and challenges faced by supervisors of
deposit taking EU banking institutions engaged in microfinance. The guidance is
not a summary of best practices, nor does it constitute new principles or revisions
to the core principles. However, it is intended to highlight the key differences
between the application of each core principle to traditional retail banking and
microfinance, pointing out areas that may require tailoring. Similarly, the Guidance
does not seek to reduce or supersede the discretion of national supervisors to act in
a manner that is consistent with their unique regulatory approach and their broader
12
See Generally Basel Committee on Banking Supervision (BCBS), 2008. “Principles for Sound
Liquidity Risk Management and Supervision”, See http://www.bis.org/publ/bcbs138.htm
13
See L. Papademos, “Financial stability and macro-prudential supervision: objectives,
instruments and the role of the ECB”, Speech of 4 September 2009.
8

9. policy goals. The analyses conducted to develop the guidance greatly benefited
from the findings of the range of practice described in this proposal, which
provides background information on supervisory issues, practices and trends for
the regulation and supervision of microfinance.14 However, micro-prudential
supervision might conflict with the European Central Bank's role in monetary
policy or expose it to excessive political pressures. Additionally, creation of two
different authorities could result in a loss of information for both macro- and micro-
supervision. In contrast as an advantage, providing the European Authority with
direct micro-prudential supervisory powers would solve co-ordination problems
and contribute to the effectiveness of macro-prudential supervision.
On the other hand of the spectrum, proposals deals with the potential
solutions, within the ambit of European System of Banking Supervisors (ESBS).
Additionally the de Larosiere group report suggest a new Regulation for Financial
Groups and also deal with Early Intervention Mechanism and Burden Sharing
Issues.
III. Potential solutions
A. European System of Banking Supervisors (ESBS)
The de Larosiere group’s recommendation proposes a new European System
of Banking Supervisors which suggests a voluntary agreement between member
14
See Jones, David S., and Kathleen Kuester King, “The implementation of prompt corrective
action: An assessment,” J. Banking & Fin. 19, 491–510 (1995).
9

10. states. This includes that states should establish the ESBS coordinated by the EBA.
Additionally this report opines that ESBS should make up of national banking
supervisors for nationally operating banks. These national supervisors will form
colleges of supervisors for cross-border banks. Further the EBA shall coordinate
national supervisors and colleges of supervisors. However, the ESBS will operate
as independent, and follow the same governance and mechanisms, as the present
Eurosystem model.15
This report also suggests a significant step to provide open participation to
non-EU countries in the ESBS. The report classifies the supervision of cross-
border banks in three tiers. First to the day-to-day supervision, which requires
supervisors to be close to a business, will remain to national supervisors. Second,
for the decision level aspect, it suggest that strategic decisions affecting the entire
group will be supervised by colleges of supervisors. Third, a noteworthy one, that
it provide a legally binding supervisory powers for each cross-border institution.
Additionally report enhance the role of EBA by enhancing its coordination in
supervision and information sharing. Report also provides a further function of
EBA, that EBA should participate within each college of supervisors and define
the issues. It shall have the final legally binding decision in the college. It also
gives the duty on EBA to coordinate early intervention mechanisms.16
Report also mandates a need for new regulation for MNBs. This is required
in order to define the responsibilities and powers of the parent company,
15
Detragiache, E., P. G. Garella, and L. Guiso, “Multiple versus Single Banking Relationships:
Theory and Evidence,” J. Fin. 55, 1133-1161(2000).
16
Commission Decision 2004/10/EC of 5 November 2003, “Establishing the European Banking
Committee”, O.J. L 003 of 7 January 2004, p. 0036-0037.
10

11. subsidiaries/branches. It is also required for institutional mechanisms for early
intervention. This will allow neutrality towards the organizational structure of a
banking group (branches vs. subsidiaries) and better and clearer allocation of
responsibilities between national supervisors, colleges and the EBS.17 The main
policy objective of the proposal is to enhance cross-border supervisory co-
operation for supervisory action to be perceived as unified by virtue of the
corresponding function of EBA within the ESBS regime. The present discussion of
the report identifies some of the key issues that provide a potential solution by the
role of ESBS and EBA in managing crises involving cross-border banks.
The de Larosiere group report makes each national supervisor jointly
accountable for the supervision of the cross-border groups operating in their own
territory. It suggests them to participate in the appropriate colleges of supervisors.
This would make all parties (participant) internalize the external effect caused by
(the lack of) supervision, thus avoiding regulatory arbitrage. By virtue of that the
risk of home country bias will be reduced and it will also provide the right
incentives to fully cooperate in and exchange all relevant information. As
independent, the ESBS (including the EBA) will be accountable to political
authorities for financial stability and crisis prevention and management.
According to the proposal, all powers not delegated to the EBA will remain
in the hands of national authorities. However it will be exercised within the college
of supervisors. College of supervisors shall take the relevant decisions relating to
17
See art. 105 of the Treaty establishing the European Community, Consolidated Version O.J.C
325 of 24 December 2002, p. 0001-0184 and art. 25 of the Protocol on the Statute of the
European System of Central Banks and of the European Central Bank, O.J.C 191 of 29 July
1992, p. 0068-0079.
11

12. strategic, consolidated supervision of the group, under the coordination of the
EBA. The EBA will retain legally binding final powers in the case of a dispute
between national supervisory authorities within the college.18 Regular meetings of
the college of supervisors would take place in the Member State of the parent
institution of the cross-border banking group (home Member State). Colleges of
supervisors will have binding supervisory powers, performed by the national
supervisors within the college. In the case of dispute between national supervisors,
the relevant decisions will be taken by the representatives from the EBA. Banks
operating domestically will remain under the supervision of national authorities.19
In all cases, report impose the compliance law based on the European
System and suggest that European System of Banking Supervisors20 should act
according to existing EU and national legislation and within the EU institutional
framework. This report also gives various alternative routes and options as a
solution in case of a lack of European political consensus, proposes to the
European Commission for an enhanced cooperation.
18
The Transformation of the European Financial System, European Central Bank, Frankfurt,
2003, See http://www.ecb.int/pub/pdf/other/transformationeuropeanfinancialsystemen.pdf
19
Wymeersch, E. (2005), The future of financial regulation and supervision in Europe, See
SSRN: http://ssrn.com/abstract=728183.
20
See Dirk Schoenmaker and Sander Oosterloo, “Cross-Border Issues in European Financial
Supervision”, See nt. 4, p. 11 referring to J. Dermine, “Banking in Europe: Past, Present and
Future” in Vitor Gaspar, Philipp Hartmann and Olaf Sleijpen (eds.), The Transformation of the
European Financial System, European Central Bank, Frankfurt, 2003, See
http://www.ecb.int/pub/pdf/other/transformationeuropeanfinancialsystemen.pdf.
12

13. B. New Regulation for Financial Groups
In order to achieve full harmonization this report supports that European
Commission should propose a harmonized regulation for MNBs. This regulation
will harmonize risk management rules and define the responsibilities and powers
of the parent company and the branchessubsidiaries within the specific context of
the banking sector and of a more efficient centralized supervision. It will also grant
a sector-specific form of protection to minorities and creditors. In addition, it will
21
set out the mechanisms for early intervention and crisis management. However
this new regulation on financial groups will set conditions for the recognition of the
parent company's management powers over the whole group and it will include
asset transferability. As a result of this change, branch and subsidiary structures
will become relatively fungible. Furthermore new regulation will also define ex
ante rules on deposit insurance and lender of last resort. This will provide a clear
allocation of responsibilities, thus avoiding regulatory arbitrage and reducing
systemic risk.
An integrated European supervisory model will support for a European
Banking Group as it will set out the core regulatory framework for cross-border
banking groups in Europe. Further rules should be adopted by the EC, which is a
second level regulation within the Lamfalussy regulatory architecture (as in the
21
See Niemeyer, Jonas, “The Regulatory Framework for Banks in the EU: An
Introduction,”Eco. Rev. 2(2006).
13

14. cases of the Market Abuse Directive and Markets in Financial Instruments
Directive {MiFID}).22
The need of new regulation also supported as part of an effort to encourage
the development of a single economic market. Earlier in this same line the Second
Banking Directive (1988) as modified in 1995 established three principles –
harmonization, mutual recognition and home country control. These principle
states as “Harmonization requires that a minimum set of uniform banking
regulations be adopted across the Union. Mutual recognition means that during the
transition to a single market, member countries would honor the regulations and
policies of the other member states. Finally, regulation and supervision by the
“home country” (country of charter) would have precedent over regulation and
supervision by a “host country.”23 Together with the concept of a single license,
these three principles mean that, once a banking institution receives a charter from
an EU member state, it would be permitted to establish branches anywhere within
the EU without the necessity of review by the regulators in the host countries into
24
which it expanded.” On the other hand, the proposed regulation will impose an
additional regulatory cost on subsidiary structure. This will hinder the most
22
Schoenmaker, D. and Oosterloo, S., “Financial Supervision in Europe: Do we need a New
Architecture”, ELEC, (2006).
23
See David Mayes & Jukka Vesala, “On the Problems of Home Country Control” at 19–21,
Bank of Finland, Studies in Economics and Finance 20/98 (1998).
24
Regardless, of the form of entry, however, the Core Principles for Effective Banking
Supervision (Basle Committee on Banking Supervision (1997)) clearly indicates that supervision
is to be “effective” within the EU, regardless of whether it is provided under the auspices of the
home or host county.
14

15. efficient allocation of resources through the internal capital market of the banking
groups. Report proposed that new substantive regulations should be applicable to
cross-border banks on a voluntary basis. But it can also be argued that a mandatory
regulation would be better suited for the purposes of leveling the playing field and
avoiding regulatory arbitrage.
There are also certain arguments which provide grounds for the proposed
European Commission. First argument suggests that the legal instrument of a
directive is not appropriate for this purpose, as discretion is left to Member States
in implementation. This argument further suggests that a regulation would be
better suited, if the relevant rules would be directly applicable and uniform in all
Member States. The ESBS will clearly benefit from regulatory uniformity and the
EBA could further enhance it by adopting common policies, standards and
interpretations of harmonized supervisory rules which would be binding for all
members of the supervisory network. In order to achieve full harmonization,
common implementing measures could be provided by an EC regulation (in line
with what occurred in the cases of the Market Abuse Directive and MiFID).25
As per the recommendation in the report, European Banking Groups
Regulation (EBGR) should apply to banks with at least one branch or subsidiary26
in a Member State different from the home Member State. No distinction should be
made between branches or subsidiaries in order to achieve neutrality with respect
25
Majaha-Jartby, Julia, and Thordur Olafsson, “Regional Financial Conglomerates: A Case for
Improved Supervision,” 05,124(2005) (IMF).
26
See Cerutti, Dell’ Ariccia, and Peria, “How banks go abroad: Branches or Subsidiaries?”, J.
Banking & Fin., vol. 31, Issue 6, 1669 (2007); George Kaufman,“Banking Regulation &
Foreign-Owned Banks” (2004).
15

16. to the legal structure of the group. This regulation will guarantee an enhanced role
of coordination for the parent company towards its subsidiaries/branches. This
means that the group as a whole must make up a logical and economic unit.
However, individual companies must retain a certain degree of independence, i.e.
the parent company may not treat its subsidiaries merely as “departments”, thereby
completely, or even significantly, ignoring the interests of the subsidiaries.27
The management of the parent company should be at the centre of group
planning and decision-making. However, there is no need for exact and immediate
compensation for the unequal burdening of an individual subsidiary. Compensation
might even occur years later and indirectly, through the benefits to the group as a
whole with the individually burdened subsidiary being a part of it. The relevant
interests, in fact, shall always be assessed on a mid to long-term basis. However,
even in the pursuit of the group interest as a whole, individual subsidiaries may not
be either unreasonably burdened or arbitrarily advantaged at the expense of other
group members. In any case, the burden of individual subsidiaries may never
exceed its capacity to pay or jeopardize its soundness.28
Within this framework the parent company shall be free to enact its role of
direction and coordination of the group as a whole, thereby enabling the effective
27
Global Bank Insolvency Initiative, “Legal, Institutional, and Regulatory Framework to Deal
with Insolvent Banks”; Financial Stability Forum, “Guidance for Developing Effective Deposit
Insurance Systems” at 8–11 (September 2001); IMF Legal Department, “Orderly & Effective
Insolvency Procedures” (1999).
28
Degryse, H., and S. Ongena, The Impact of Competition on Bank Orientation, J. Financial
Intermediation 16, 399-424(2007).
16

17. functioning of the ICM within the MNB. This would allow group-wide, centralized
risk management and compliance with capital requirements.29
The regulation would allow a uniform set of rules creating a level playing
field, ensuring the effective functioning of the ICM and achieving neutrality with
respect of the legal structure of an MNB. On the other hand, harmonization
proposed for the bank includes the information sharing requirement. However
proposed report lack the uniform application of this information sharing issue due
to the privacy laws in different countries. This report fails to provide that how to
resolve this issue. As concerned by the regulators, secrecy legislation remains an
impediment in certain circumstances and jurisdictions. In this case, while
recognizing the legitimate issues and reasons for protecting consumer privacy will
affect the mechanism of information sharing requirement for harmonization,
because such secrecy laws should not impede the ability of supervisors to ensure
the safety and soundness in the international banking system.
Additionally, report fails to address that how will the new regulation face the
challenge of diverse regulations in different EU countries. For an example, in
England and Wales, Financial Services Authority30 regulates and supervises all the
financial services including banking. Likewise other EU territories have different
set of regulations. This report fails to disclose that how the uniform regulation shall
take place in this diverse regulatory region.
29
See Henk Brouwer, Gerbert Hebbink & SandraWesseling, “A European Approach to Banking
Crises,” in David Mayes & Aarno Liuksila, eds., Who Pays for Bank Insolvency? at 211 (2004);
30
FSA, available at http://www.fsa.gov.uk/
17

18. C. Early Intervention Mechanism and Burden Sharing Issues
The UniCreditGroup report gives stronger emphasis to trigger mechanisms
for automatic adjustment and early intervention mechanisms in order to minimize
the need to resort to public money. A reform of Deposit Guarantee Schemes
facilitates this approach.31 The current financial turmoil has shown the importance
of defining a consistent regulatory framework for crisis prevention, management
and resolution. A macro-supervision scheme, such as the one proposed by the de
Larosière Group, represents from this point of view a crucial element that with
respect to micro-level, a uniform framework should be applied across countries
and developed on the assumption of an MNB being a single undertaking. This
framework generally addresses, inter alia, the crucial issue of negative spillovers
arising in the event of a branch of a foreign institution going bankrupt and the
Deposit Guarantee Scheme (DGS)32 of the host country. However, it is inadequate
to fulfill its obligation towards foreign depositors (the small country issue). Any
proposal relating to crisis prevention generally implies an a priori consideration on
how to deal with the trade-off between moral hazard for banks and effectiveness
in crisis management.
In the same line a ‘Prompt Corrective Action’ (PCA) scheme as suggested,
will reduces the risk of bank failure by requiring action to be taken in the early
stages of financial distress to try to stop the problem from escalating. In the case of
31
Evidence from Foreign Bank Entry in Emerging Markets, Review of Finance 13, 181-223.
32
See Michael Krimminger, “Deposit Insurance and Bank Insolvency in a Changing World:
Synergies & Challenges,” Current Developments in Monetary and Financial Law, IMF (2004)
available at www.imf.org.
18

19. an ailing MNB, the EBA is empowered with the authority to nominate a task force
for corrective action.33
The task force will be formed and function to propose a plan for the
reorganization and the winding-up of the banks belonging to a cross-border group
mobilizing private resources and deposit guarantee funds. This will be
implemented in order to minimize the eventual need for public money. Deposit
guarantee funds will have to balance the costs of early intervention with the risk of
higher costs in the case of bankruptcy. The task force shall have powers to trace
asset transfers within subsidiaries.34 The de Larosiere Report partially address the
problems like the Obstacles to asset transferability between group entities , because
it do not allow for fully consolidated supervision, centralized compliance and risk
management of cross-border banking groups. However, asset transfers still face
several obstacles in the company, insolvency and banking laws of several Member
States, as harmonization is still lacking. Moreover, differences are found between
the subsidiary and the branch structures that will affect the compliance
requirement. For more effective and timely early intervention in crisis
management, clear-cut trigger events should be established, which should focus not
only on solvency but also on liquidity. Indeed, recent bank failures have shown that
the borders between liquidity and solvency crisis are often blurred, as liquidity
crises might rapidly turn into solvency crisis, especially in listed banks. In order to
avoid moral hazard, however, no clear ex ante rules should address the bail-out of
33
See Cihàk, M. and Decressin, J. (2007), “The Case for a European Banking Charter”, IMF
Working Paper, WP/07/173.
34
Nguyen, G., National Bank of Belgium, Fin. Stability Rev., 89–102(2008).
19

20. an insolvent bank with public funding, which shall remain a political issue to be
dealt with at national level.
Centralized supervisory system, such as the one proposed here in the report,
is in itself a fundamental improvement on the status quo. However, a joint reform
of national DGSs would make it more effective and credible. The debate on the
reform of banking supervision generally falls short of also discussing a reform in
DGSs. The possible reforms that have been investigated so far mainly concern the
harmonization of DGSs across Europe.35
It should also be clear that, regardless of the type of reform, a DGS may not
be sufficient in facing systemic events, such as diffuse episodes of financial
distress or the failure of a large banking group. Both banking supervision and
DGSs have implicit costs and benefits. Banking supervision helps maintain
financial stability but it can be relatively more costly, both for banks and taxpayers.
DGSs can help prevent and contain the overall costs of a crisis but they have the
downside of engendering moral hazard in normal times.
A well-designed and comprehensive DGS reform in the banking sector has
not yet been proposed, probably due the complexity of the issue. In this case, what
concerns is the definition of clear rules of burden sharing between countries. Some
burden sharing rules should have been proposed in the literature.36A feasible
35
See Dr. Alan Bollard, Governor, Reserve Bank of New Zealand, in address to Trans-Tasman
Business Circle in Sydney, Australia, August 11, 2004; See also Basel Concordat (1983); The
Supervision of Cross-Border Banking (1996); and Supervision of Financial Conglomerates
(1999).
36
Ongena, S., and D. C. Smith, The Duration of Bank Relationships, J. Fin. Eco. 61, 449-
475(2001).
20

21. alternative is, rather, to leave the determination of burden sharing, when fiscal
resources are involved, to the negotiation of national authorities. If there is no
government agreement on burden sharing or the common decision of the EBA and
relevant national governments is to let the group fail, national bankruptcy rules
should be applied and the EBA should also provide information to national judicial
courts.37 Due to remarkable differences in domestic bankruptcy laws, it is highly
unlikely, at least at this stage, that harmonization in bankruptcy regulations across
Europe will occur. Moreover, Davide Alfonsi discussed38 the various issues and
problems of this report in European parliament on Oct. 7, 2009 as:
“Once more, we come back to a problem of institutional architecture, which
in this case can involve also the creation of uneven playing fields between
Europe and the rest of the world. Our obvious recommendation is that all
international institutions entitled with designing the new financial
architecture work closely together and that impact and spill-over effects of
the whole set of new rules be carefully assessed before implementation.”
On December 1, 2009 on the same lines, European Banking Federation gives
support with the key features39 to the European Commission proposals on the
reform of the European supervisory architecture.
37
Hardy, D.C. and Nieto, M.J., “Cross-Border Coordination of Prudential Supervision and
Deposit Guarantees”, IMF WP/08/283.
38
Davide Alfonsi, EPFSF Lunch Discussion, European Parliament, Brussels “Financial
supervisory architecture”, Oct 7, 2009.
39
EBF position on the EC proposals on the reform of the ESA, Nov. 2009, available at
http://www.ebffbe.eu/uploads/documents/positions/FinMark/D1839C2009%20_CESR_Consulta
tion_on_Trade_Repositories_in_the_European_Union.pdf
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22. V. Conclusion:
The focus of UniCreditGroup report has been on the structure of supervisory
and regulation for banking groups in cross-border banking through branching with
particular emphasis on the EU and the related aspects of failure resolution and
coordination when financial problems arise. The present issues reforming cross-
border banking is important and deserves attention because the impact of resulting
crisis. This report has identified a number of issues and concerns about the present
system design that are likely to result in higher than necessary mechanism for
cross-border banking. At present date, substantial progress appears to have been
made in the EU in dealing with them. Indeed, as both cross-border branches and
subsidiaries increase in importance in host EU countries. Implementing these
proposals would go a long way towards mitigating or possibly even eliminating
many rules of the EU regulation and related supervisory problems inherent in the
current multiple and confusing EU banking regime and across countries.
Finally, UniCreditGroup report propose a mechanism to put such a scheme
into place quickly in the case where a cross-border banking organization seeks to
take advantage of the liberal cross-border branching provisions in the single
banking plate-form available to banks in the EU.
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