ABSTRACT
A banking failure could severely affect the functioning of the financial system and generate substantial costs both in large nominal terms and, ultimately, in the form of loss of output in the real economy. It is not easy to assess the costs of a banking crisis, but some attempts have been made. Hoggarth et al. (2002) estimated the cumulative output losses of a banking failure to between 15 and 20 per cent. The average fiscal costs of resolving a banking crisis is estimated to be approximately 13 per cent of GDP (empirical analysis of 40 banking crisis episodes) in the study by Honohan and Klingbiel (2003). The Nordic banking crisis in the early 1990s is estimated to have had a fiscal cost of approximately 8 per cent of GDP. Hence, even if estimates vary it is clear that costs could be substantial. Cross-border banking and global crisis resolution is certainly a very timely topic. A financial turmoil may quickly become a worldwide concern. Today, there are about 50 cross-border banking groups, of which more than 20 banks have substantial cross-border activity in Europe. A failure in any of these banks would not only be costly but also pose new challenges for authorities and supervisors responsible for financial stability. This problem will remain as long as the regulatory framework, supervision, crisis management and crisis resolution continue to be as internationally uncoordinated as they are today. Two important lessons can be drawn from the development of the financial markets. First, crises will be costly and thus weaken economic growth. Second, financial crises can have clear cross-border implications. Such a changing environment causes constant challenges both to the functioning and stability of the financial system. This chapter presents today’s challenges and future solutions on how to achieve financial stability with cross-border banking. It starts with a section that describes the pros and cons of cross-border financial integration. The main focus will be on European banks but described arguments are, of course, also applicable to a wider international framework. Taking a broad view of cross-border banking, the following section is devoted to the challenges facing authorities in order to secure financial stability with increasing international exposures. The chapter continues with a discussion on how to move forward from today’s framework and ends with a conclusion.
