Cross-Border Stability Framework Lars Nyberg, 21 May 2010 INFORMATION CLASSIFICATION: PUBLIC

The logic inconsistency of the EU financial market framework 1 internal market, 27 sovereign states A source of: Conflicts Co-ordination problems  Obstacle to further integration and no optimal model for financial stability

Some evidence from the crisis Lack of overall policy coordination Fortis: Disagreement on burden sharing led to suboptimal resolution Icesave: Only losers (The Icelandic burden and the lack of supervisory influence of UK and NL) Nordic/Baltic experience: Risks seen but no action taken

The ”Financial trilemma in Europe” (Schoenmaker) 3 objectives Financial stability Integration Sovereignty Any par of objectives can be achieved, but never all three The million dollar question: What’s the appropriate trade-off? Financial stability Sovereignty Integration

The pre-crisis approach Harmonisation MoUs Colleges Few binding arrangements  sovereignty at the expense of stability (and integration) All agree that change is now needed, but how? Financial stability SovereigntyIntegration

Three basic options 1. The federal approach: Delegation of powers to the EU-level Centralised supervision and crisis management 2. Back to national financial systems: Abandon home country supervision and pass- porting rules (and introduce restrictions in free movement of capital) 3. Reforming the current model: Better co-ordination, more harmonisation (the de Larosière approach) Clarifying and aligning powers of supervision and crisis management

1. The federal approach Problems and risks can be managed at the level where they exist: Coordination problems and conflicts mitigated (but sovereignty goes) If supervisory powers transferred, crisis management must follow. Requires some kind of funding mechanism at EU-level Appealing, but political feasibility low Financial stability SovereigntyIntegration

2. Back to national markets Roll-back integration Full control of the domestic financial sector Restrict cross-border capital flows to prevent contagion A serious violation of the internal market idea and most definitely economically damaging Not the way to go! Financial stability SovereigntyIntegration

3. Reforming the current model The realistic option Keep a decentralised structure but with a strengthened ”core”: Improve co-ordination Strengthen harmonisation Some centralisation of powers Seems to be the preferred approach of the EU Current weaknesses will be addressed but not fully solved! Financial stability Sovereignty Integration

The reform agenda so far On co-ordination: Strengthening the role of Ecofin/EFC Formalise co-operation structures (colleges, CBSG) Provide incentives for co-operation (procedures for burden sharing) Planning in advance (recovery and resolution plans) Decision powers to ESA’s in crisis situations Binding mediation by ESA’s On harmonisation: EU framework for crisis management, incl. funding. ESA’s to develop binding technical standards

Is it the right medicine? Clearly a step forward Not realistic to aim for a pan EU-structure (political resistance, treaty changes etc.) We need to stay committed to integration in the further process: Burden sharing Asset transfer

Crisis management Crisis management arrangements key to success First, get harmonised national frameworks in place. Second, make them as compatible as possible Third, align and sort out responsibilities and provide incentives for co-operation Fourth, be prepared If not accomplished, authorities likely to be less willing to accept cross-border banking.

Conclusions We face an unsolvable trilemma! Need to stick to “financial integration” Then, we need to make a trade off between “sovereignty” and “financial stability”… …where more weight should be on “financial stability”… …but unrealistic (and inappropriate) to go all the way The current agenda looks promising, but it needs to be delivered.