Cross-Border Banking in the Balance

In 2008, such a catastrophic scenario was narrowly avoided, owing to policy intervention, including the coordination effort under the so-called Vienna Initiative (in which the European Bank for Reconstruction and Development, among others, was involved). A new pact to secure the achievements of financial integration is now urgently needed. Authorities from these banks’ home and host countries must sit down together.

As with the Vienna Initiative, a Vienna 2.0 would require commitments by all concerned parties. In responding to the higher capital requirements imposed by authorities, and choosing whether to raise more capital or sell off assets, the banks must take into account the important role that their subsidiaries play in many countries. For many banks, this happens naturally – their subsidiaries, as important value creators, are critical to their business models. For some, however, the subsidiaries are smaller relative to the parents’ size – and thus less central to their strategies.

Home countries must also contribute. Within the eurozone, any recapitalization, guarantees, and other funds offered to parent banks should be made available to subsidiaries in equal measure. Any restructuring requested in return for capital support should take into account the cross-border nature of the groups and not discriminate against subsidiaries abroad.

Subsidiaries’ host countries, for their part, must reassure parent banks that financial regulation will remain predictable. Some of the recent abrupt – and at times overly ambitious – measures to tax the industry or redistribute the burden of foreign-currency loans have undermined capital cushions and set back recovery in credit and growth.

All of this requires coordination. The European Banking Authority has a chance to establish itself. It must ensure that national interests do not undermine the integrity of the cross-border bank groups. Ultimately, we need a Europe-wide deposit insurance and bank-resolution authority that can take over and restructure failed banks.

Just as the eurozone has fostered financial development and economic growth among its members, the current crisis now risks inflicting severe collateral damage far beyond its borders. Any sustainable solution to the crisis must ensure the integrity of the bank groups and respect the interests of these banks’ home and host countries. Ultimately, it is cross-border banking that is in the balance.

Erik Berglof is Chief Economist, European Bank of Reconstruction and Development.

Copyright: Project Syndicate, 2011.www.project-syndicate.org

©RIPRODUZIONE RISERVATA