## _wp07173

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### I. Purpose and overview
- Establishes the concept of a European Banking Charter (EBC) as an EU-level prudential regime option to foster European financial integration and stability.
- Positions the EBC as an alternative/complement to the EU Financial Services Action Plan (EU FSAP) and the Lamfalussy framework.
- Core design principle: banks freely choose whether to operate under the EBC or under national prudential frameworks, letting market forces reveal the preferred balance between EU-level and national regulation.
- Stated aims of the EBC:
  - achieve a prudential level playing field for European banks;
  - remedy problems from national segmentation of Europe’s financial stability framework;
  - level the playing field for cross-border banking business to boost competition and productivity;
  - improve cross-border supervision of large, complex cross-border financial institutions (LCFI).

### II. The current European financial system — key facts and dynamics
- Structure and market composition
  - The vast majority of Europe’s approximately 8,000 banks mainly serve national markets and are expected to continue doing so over the foreseeable future.
  - For retail (customer) business, the cross-border component does not exceed 5 percent and has not shown any marked increase over time.
  - Banking is still the least “Europeanized” sector of the economy by some measures.
  - Large cross-border banks are emerging and increasing their market share, with cross-border flows, foreign bank shares in domestic markets, and cross-border mergers and acquisitions gaining momentum.
  - A mapping exercise: some 46 LCFIs hold about 68 percent of EU banking assets.
    - Of these, 16 key cross-border players account for about one third of EU banking assets,
    - hold an average of 38 percent of their EU banking assets outside their home countries,
    - and operate in just under half of the other EU countries.
- Consequence
  - A small subgroup of institutions (less than 1 percent of European financial institutions by number) accounts for a majority share of EU banking assets, driving the urgency for targeted EU-level prudential arrangements.

### III. Existing regulatory and supervisory framework — status and shortcomings
- Regulation
  - Second Banking Directive (1993) introduced home-country control, mutual recognition, and a “single passport” for branching.
  - Despite EU initiatives (EU FSAP, Lamfalussy committees, CEBS, 2006 Capital Requirements Directive (CRD), forthcoming Solvency II, Markets in Financial Instruments Directive), cross-country differences persist.
  - Implementation gaps:
    - Roughly one hundred national specificities remain even for the CRD.
    - “Goldplating” by national authorities adds national requirements beyond EU directives.
    - These divergences create a high regulatory burden for cross-border institutions.
- Supervision
  - Cooperation strengthened via Memoranda of Understanding (MoUs) and supervisory colleges, but MoUs are generally nonbinding and may not resolve tensions in crisis situations or ensure real-time information access.
  - Institution-specific MoUs exist (e.g., Nordea, Sampo) but are limited in scope and legal force.
- Crisis management and resolution
  - MoUs of 2003 and 2005, CRD, and Conglomerates Directive set out information-sharing principles.
  - Winding-Up Directive assigns key responsibilities but leaves most decision-making at national level.
  - Weaknesses include:
    - lack of fully effective pre-crisis sanctions and tools in many countries;
    - large differences in deposit insurance schemes despite EU law on coverage for foreign branches;
    - many countries lack bank-specific insolvency regimes, making LCFI crisis resolution a protracted national judicial process that may not address systemic cross-border effects satisfactorily.

### IV. Fundamental problems identified
- Core framing
  - The framework must reconcile rapidly increasing market contestability across borders with national accountability for domestic financial stability.
  - Financial institutions currently face 27 different prudential regimes.
- Key economic and incentive problems
  - External spillovers of domestic actions during LCFI crises.
  - Diverse incentives of national supervisory agencies accountable only to domestic authorities.
  - Dispersed and asymmetric information among supervisors and collective-action and moral-hazard problems in large institutions.
  - In crisis, national supervisors have incentives to centralize assets or ring-fence assets—producing a “chaotic scramble for assets.”
- Limitations of current remedies
  - Nonbinding MoUs, promises of more cooperation, and further harmonization do not resolve the core incentive and information-dispersion problems.
  - What is needed: joint responsibility and accountability of national supervisors rather than self-interested national behavior.

### V. Box 1 — Mechanism-design impossibility and implications (Green and Laffont, 1979)
- Formal mechanism-design problem
  - Supervisors hold private information signals θi; supervisors maximize expected Bernoulli utility u_i(x, θ_i).
  - Collective choice function f maps Θ1×...×ΘI into a resolution x = f(θ1,...,θI).
  - Ex-post efficiency defined: for no θ does there exist x∈X such that u_i(x, θ_i) ≥ u_i(f(θ), θ_i) for every i, and u_i(x, θ_i) > u_i(f(θ), θ_i) for some i.
  - Dominant strategy implementation is desirable for robustness to belief errors.
- Impossibility result statement
  - If the set of possible information signals is sufficiently rich (as in major cross-border bank failures), then no collective choice function that is implementable in dominant strategies is also ex-post efficient.
- Construction details highlighted
  - Resolution alternative x is a vector x = (k, t1,..,tI), with k∈K and ti monetary transfers.
  - Assume for each supervisor i that {v_i(·, θ_i): θ_i∈Θ_i} = {all possible valuation functions from K to ℜ}.
  - Even allowing transfers with ∑_{i=1}^I t_i(θ) = 0 and requiring k*(θ) to satisfy ∑_{i=1}^I v_i(k*(θ), θ_i) ≥ ∑_{i=1}^I v_i(k, θ_i) for all k∈K, no mechanism implementable in dominant strategies yields ex-post efficiency.
- Consequences and policy implication
  - With self-interested national accountability and private information, supervisors cannot credibly reveal private information without potential national cost.
  - Efficiency requires collective joint responsibility and accountability of national supervisors and commitment to EU-wide crisis cost minimization to enable ex-post efficient outcomes.
  - Resulting moral-hazard issue: absence of a credible exit threat for LCFIs increases perceived likelihood of solvency support.

### VI. The European Banking Charter (EBC) proposal — key design points
- General design
  - EBC would be available in each participating EU member state as a single prudential regime (effectively a 28th regime).
  - Neutral treatment of legal form: branches and operationally-integrated subsidiaries treated the same for prudential purposes; conversion into a European Company (SE) suggested to achieve neutrality.
  - Freedom of choice: banks choose between EBC and national charters; mandatory application to a subset (e.g., systemically important banks) rejected.
  - Likely legal form: EU regulation (directly applicable and binding) preferred over EU directive.
- Supervisory organization example
  - “Hub and spokes” model: national supervisory teams for each LCFI report to all national supervisors; decision-making by qualified majority voting when disagreements arise; joint accountability to the European Parliament.
- Supporting EU-wide arrangements envisaged
  - harmonized supervisory powers and practices;
  - uniform prudential regulation;
  - a single deposit insurance scheme;
  - ideally an EBC-specific bank insolvency regime.
- Rationale tied to Box 1
  - Joint responsibility and accountability of European supervisors for EBC-chartered banks and a commitment to EU-wide bank crisis cost minimization are key to making a single regime work and to enabling efficient information revelation.

### VII. Attractions and expected benefits of the EBC
- Cost and efficiency gains
  - Cost savings for taxpayers via elimination of supervisory duplication and by plugging gaps.
  - Cost savings for cross-border institutions and customers through a single supervisory/regulatory framework.
- Market and policy benefits
  - Level playing field across Europe without top-down harmonization of national prudential policies and insolvency laws.
  - EU-wide financial stability framework resolving integration vs national accountability tensions (joint responsibility/accountability for prevention, management, resolution, and taxpayer savings).
  - Regulatory framework more attuned to cross-border business needs with streamlined supervision and reporting.
  - Consumers and firms can choose pan-European or national banking providers.

### VIII. Main issues, constraints, and required trade-offs
- Centralization vs decentralization
  - Balance needed between decentralized local knowledge and an EU-level framework that addresses LCFI systemic risks; tension derives from the small number of LCFIs (less than 1 percent by number) accounting for most assets.
- Funding of supervision
  - Heterogeneity: some countries industry-funded, others budget-funded.
  - Industry funding at EU level could make migration less attractive for institutions currently not paying fees; shifting funding can affect regulator incentives and banks’ incentives to switch charters.
- Funding financial crisis resolution and burden sharing
  - Shared supervisory responsibility implies sharing crisis costs; arrangements must prevent countries from walking away when collective-cost-minimizing solutions impose higher costs on some countries.
  - Deposit insurance as a starting vehicle:
    - EU-wide deposit insurance funded by industry may be politically preferable but requires careful calibration.
    - Deposit insurance operator may need the ability to issue bonds backed by full-faith guarantees of participating countries, implying burden sharing if the scheme cannot be replenished by banks.
  - Public support instruments (guarantees, bridge banks) complicate cross-country contribution sharing.
  - Transparency, credible exit discipline, and stronger prudential tools can limit crisis costs.
- Insolvency regime
  - Absence of pan-European bank-specific insolvency regime undermines a single economic-entity approach: Winding-Up Directive treats branches under home-country responsibility, subsidiaries under host-country proceedings.
  - Preferred conceptual approach: universality across the board for insolvency to allow global administration and reduce legal complexity and transaction costs.
  - Conversion to a European Company could facilitate creation of an EU insolvency regime, or the insolvency regime could be added later (risking crisis cooperation frictions).
- Regulatory competition and calibration risk
  - Multiple charters could spur competition and risk “race to the bottom”; calibration of the EBC is critical to ensure major banks have the incentive to sign up while avoiding harmful competition.
  - Mandatory EBC for LCFIs was rejected due to level-playing-field concerns and definitional difficulties.

### IX. Alternatives and complementary approaches
- Lead supervisor concept
  - Authority rests with home supervisor; criticized for neglecting host-country financial stability concerns.
- Strengthened MoU framework
  - Expanded and institution-specific MoUs (Nordic examples) can enhance cooperation but are generally nonbinding and slow to scale EU-wide.
  - MoUs can be useful complements within an EBC framework, including binding MoUs with enforceable sanctions as a possible improvement.
- Other alternatives
  - Single European supervisor or reinforced Lamfalussy structure.
  - Reliance on market disclosure and market discipline judged unrealistic in current EU setting.

### X. Appendix highlights — supervisory colleges, SE, and insolvency
- Institution-specific MoUs and supervisory colleges (Nordic examples)
  - Supervisory colleges: members from each supervisory authority, convene at least quarterly, do not override national authority, produce annual overall risk assessments and joint supervisory plans, coordinate inspections and information exchange, and maintain contingency plans and contact with ministries of finance and central banks.
  - Secretariat roles: Swedish FSA for Nordea, Finnish FSA for Sampo.
- European Company Statute (SE)
  - SE enables companies operating in more than one member state to merge and operate under Community law with a single governance and reporting system.
  - Limitations: does not cover taxation, employment contracts, or pensions; leaves national discretion on worker involvement; VAT treatment of centralized groups can increase cross-border VAT costs and impair centralization economics.
- Bank insolvency in Europe
  - Case for a special bank insolvency regime: banks’ public-good-like functions (asset-liability mismatch, payment services, transmission of monetary policy) and LCFI-specific externalities (critical infrastructure, liquidity crunches, fire sales).
  - Current practice: territoriality dominates insolvency law; branches governed by Winding-Up Directive (home-country responsibility), subsidiaries subject to host-country insolvency proceedings.
  - Preferred approach: universality across the board to reflect the bank’s economic unity, facilitate global administration, and increase estate value.
  - Comparative note: many European countries use general insolvency law; Canada, United States, and Italy use supervisor/agency-administered special bank-insolvency regimes (e.g., FDIC in the United States).

### XI. Conclusion — objectives, trade-offs, and the EBC’s role
- Two primary objectives: creating a level playing field and ensuring financial sector stability.
- Tension exists because stability concerns focus on a small set of LCFIs while level-playing-field concerns impact all banks.
- Making a prudential framework mandatory for LCFIs would raise level-playing-field issues; building a uniform framework for all institutions based solely on LCFIs’ needs would be overly arduous and unnecessary.
- The EBC offers:
  - a mechanism to drop prudential distinctions between branches and operationally-integrated subsidiaries;
  - freedom of choice for banks between national and European charters to let market forces reveal the preferred mix of EU and national frameworks;
  - joint responsibility and accountability to address cross-border incentive and information problems highlighted in Box 1;
  - a targeted, potentially rapid way to fill important gaps in Europe’s financial stability framework without full institutional overhaul.
- Limitations: the EBC is not a panacea; non-prudential legal and regulatory regimes (taxation, consumer protection, product rules, corporate governance) remain national; careful calibration and credible burden-sharing, insolvency, and deposit insurance arrangements are prerequisites for the EBC’s success.

*Excerpted from _wp07173 (IMF Working Paper PDF).*

### References..............................................................................................................

### References

### I. Introduction and purpose of the paper
- Explains how establishing a specific EU-level prudential regime—a European Banking Charter (EBC)—could foster European financial integration and stability.
- Positions the EBC as an alternative route to achieve EU-wide prudential convergence alongside ongoing initiatives such as the EU Financial Services Action Plan (EU FSAP) and the Lamfalussy framework.
- Under the EBC, all banks would be free to choose under which charter and supporting prudential framework—EBC or national—to operate, thereby affording market forces a greater role in balancing EU-wide against national regulation and supervision.
- The EBC aims to:
  - achieve a prudential level playing field for European banks;
  - remedy problems from national segmentation of Europe’s financial stability framework;
  - level the playing field for cross-border banking business to boost competition and productivity in Europe’s financial services sector;
  - improve cross-border supervision of large, complex cross-border financial institutions (LCFI).

### II. Rationale and key arguments
- Creating an EU-level prudential regime does not necessarily require a single European regulator/supervisor; the regime can be targeted, especially at institutions with cross-border ambitions.
- The need for a streamlined and harmonized EU-level prudential regime is most urgent for those financial institutions that have cross-border ambitions, notably the LCFI, and not for the vast majority of Europe’s 8,000 banks that cater mainly to national markets.
- Two central considerations:
  - Difficulty of determining exact amount and areas of prudential convergence required:
    - Financial markets are extremely complex and the “marginal product” of regulatory action is very difficult to assess.
    - Prudential convergence becomes, to some extent, a lengthy process of trial and error.
    - The EBC directly involves market players in establishing the right mixture of centralized versus decentralized prudential policies and practices and therefore reduces the potential for errors along a key dimension of the integration process.
  - Importance of harmonized EU-level prudential framework for supervision of LCFIs:
    - LCFIs are rapidly changing the banking landscape in Europe.
    - Introducing an EBC would allow faster progress on supervision, complementing national banking charters with an alternative tailored to LCFIs.
    - The EBC’s supporting EU-wide prudential (regulatory and supervisory) framework would have to build on joint responsibility and joint accountability of national prudential authorities to ensure national supervisors pay due attention to external spillovers of their domestic actions on cross-border EBC banks.

### III. Fundamental dilemmas the EBC addresses
- National policymakers face a basic dilemma between allowing cross-border market integration and retaining accountability for national financial stability.
- Two EU-specific challenges highlighted:
  - Under the EU’s supervisory set-up, foreign branches of banking groups are subject to home rather than host-country supervision; these branches can be of systemic importance in host countries, leaving host-country financial stability exposed to home-country actions.
  - The EU’s aim to create a single financial market entails allowing financial institutions to structure their business freely, without regard to national borders.

### IV. Scope, relationship to existing work, and paper structure
- The paper builds on previous IMF work on Europe’s financial stability framework (e.g., Decressin, Faruqee, and Fonteyne, 2007; Čihák and Tieman, 2006).
- The paper:
  - identifies problems with the existing financial stability framework;
  - discusses major principles of the proposed charter;
  - outlines structure: Section II overviews the European financial system and existing framework and outlines fundamental problems; Section III spells out the European Banking Charter, presenting its features and attractions and discussing implementation issues and alternatives.

*From: _wp07173 - References.*

### Section IV concludes.

### _wp07173 - Section IV concludes.

### II. THE CURRENT FINANCIAL SYSTEM AND FRAMEWORK — A. The European Financial System
- The vast majority of Europe’s approximately 8,000 banks are mainly doing national business and are likely to continue to do so over the foreseeable future.
- For retail (customer) business, the cross-border component does not exceed 5 percent and has not shown any marked increase over time.
- Banking is still the least “Europeanized” sector of the economy according to some measures.
- Large cross-border banks are emerging and have a substantial market share; European banking integration is gaining momentum in terms of cross-border flows, market share of foreign banks in several domestic markets, and cross-border mergers and acquisitions.
- There is a rapidly growing number of LCFI that engage significantly in cross-border business, with the bulk of this business in wholesale markets (interbank and corporate bond markets relatively well-integrated; equity, securitization markets, and arms-length financing have considerable scope for further integration).
- A mapping exercise revealed that some 46 LCFIs hold about 68 percent of EU banking assets; of these, 16 key cross-border players account for about one third of EU banking assets, hold an average of 38 percent of their EU banking assets outside their home countries, and operate in just under half of the other EU countries.
- The legal, regulatory, and supervisory framework has not been able to keep up with this rapidly growing cross-border presence, notably the centralization of treasury and risk management functions of the LCFIs.

### II.B What Is Already in Place? — Regulation, Supervision, Crisis Management
- Regulation
  - The Second Banking Directive of 1993 introduced home-country control and mutual recognition, resulting in a “single passport” for branching across the EU.
  - In principle, freedom to branch could lead over time to something akin to a “single rules book,” but for national authorities this entails a loss of control over domestic financial stability.
  - For financial institutions, market entry via branching is often less attractive than via establishing subsidiaries.
  - The EU FSAP, Lamfalussy committees (e.g., CEBS), the 2006 Capital Requirements Directive (CRD), the forthcoming Solvency II Directive, and the Markets in Financial Instruments Directive have pushed legislative and regulatory convergence.
  - Nevertheless, the existing framework stops short of delivering a level playing field: considerable cross-country differences persist; implementation has not leveled the playing field because of remaining national discretion.
  - Even for the CRD there are roughly one hundred national specificities, leading some LCFIs to consider limiting the adoption of the advanced approach to their headquarters.
  - The practice of “goldplating” by national authorities adds further national requirements beyond those allowed under EU directives.
  - The lack of convergence implies a high regulatory burden for cross-border financial institutions, running counter to a unified financial market objective.
- Supervision
  - Cooperation has been strengthened; Memoranda of Understanding (MoUs) are common for collaboration and information exchange.
  - Several directives and MoUs specify a general framework for cross-border supervision and principles for cooperation and information sharing.
  - MoUs are rather general and nonbinding; they do not resolve fundamental tensions between supervisors likely to emerge in crisis, do not clarify final authority in stressful situations, and stop short of ensuring real-time access to necessary information for relevant supervisors.
  - This holds, to varying degrees, for institution-specific MoUs (e.g., for the Nordea and Sampo groups).
- Crisis Management and Resolution
  - MoUs of 2003 and 2005, the CRD, and the Conglomerates Directive established basic principles of crisis management, notably information sharing during a crisis.
  - Country-specific financial institution MoUs and several crisis-management exercises have helped establish communication channels and insights into handling cross-border crises within the current institutional framework.
  - The Winding-Up Directive has allocated responsibilities and introduced some basic principles for failing banks but left most decision-making power at the national level.
  - Important weaknesses remain: lack of fully effective pre-crisis sanctions and tools in many countries (partly because of EU shareholder rights legislation); large differences in country deposit insurance schemes despite EU law mandating that depositors in foreign branches be as well covered as home depositors.
  - Many countries do not have bank-specific insolvency regimes; LCFI-crisis resolution would likely be a drawn out judicial process with national-level decision making and cross-border business structures making systemic issues unlikely to be addressed satisfactorily.

### II.C What Are the Fundamental Problems?
- Core framing
  - The existing framework faces the challenge of rapidly increasing contestability of national financial services markets while safeguarding their stability.
  - Financial institutions face 27 different prudential regimes, limiting contestability of national markets.
  - Fundamental economic concepts underpinning stability concerns: external spillovers of domestic actions during LCFI crises; diverse incentives of national supervisory agencies (accountable to domestic authorities only); dispersed and asymmetric information among supervisory bodies at macro and micro levels; and resulting collective action problems and moral hazard in large institutions.
- Level playing field issues
  - Despite progress, the framework does not deliver a level playing field for banks across the EU; financial institutions have called for a streamlined and more coherent, consistent, and cost efficient EU prudential framework.
  - Ensuring uniform implementation of directives is the responsibility of Lamfalussy Level 3 (committees of supervisors) and Level 4 (enforcement by the Commission); progress has been mixed.
  - Lamfalussy committees lack a clear and strong mandate: charged with designing and delivering convergent prudential policies yet staffed by national prudential agency representatives accountable to national authorities—resulting in slow integration and numerous implementation options catering to national interests.
  - The outcome is, to some extent, a collection of national rather than a single set of best prudential policies and practices; policymakers increasingly emphasize “convergence” over “harmonization” and mechanisms for “mediation.”
  - More ambitious proposals include qualified majority voting in these committees and specific EU-related references in mission statements of national prudential authorities.
  - Theoretical perspective: models of public good provision by local communities and “regulatory capture” suggest that differences in regulatory regimes across jurisdictions are likely to persist when banks influence regulators.
- Cross-border financial stability issues
  - The need for more EU-wide intervention is justified by potential market failures associated with LCFI presence; while a cross-border LCFI crisis may be low probability, the costs in their absence may be very large.
  - LCFI can be “too large to fail” and also “too large to save,” being too big relative to the home country’s resources.
  - Costs of such failures are likely to be spread over a number of countries; LCFI failures can create negative externalities (payment system gridlock, liquidity crunch) and domino effects through capital market interconnections.
  - Even if a country could marshal resources, it may not be willing or politically able to make massive cross-border transfers to benefit foreign depositors; home country may be unwilling to save a bank as a whole, leaving host countries to decide whether to bail out local operations.
  - LCFI host country activities may be systemic for the host country yet not deemed worthy to save by home country authorities.
  - Information about systemic financial groups is dispersed over many national agencies; no single supervisory or other authority has a full overview of systemic risks across groups.
  - Different supervisors can apply different methodologies, producing inconsistencies in supervision between groups located in the same single financial market.
  - National regulators have different objectives and incentives and are accountable to national legislators; divergences come to the fore when problems emerge, creating incentives to maximize assets and minimize liabilities held in their jurisdiction—home authorities will want to centralize assets, host authorities to ring-fence assets, likely producing a “chaotic scramble for assets.”
  - Microeconomic mechanism-design literature suggests collective action failures are likely in crisis when financial stakes are high; private information and national self-interest lead supervisors to dominant strategies of not sharing information and using information advantages to minimize national losses.
  - Standard remedies pursued in the EU—nonbinding MoUs, pledges of more cooperation, further harmonization—do not address the underlying problem; what is needed is joint responsibility and accountability of national supervisors rather than “self-interested” behavior driven by national accountability.

*Source: _wp07173 - Section IV concludes.*

### Box 1. Impossibility of Implementing Ex-Post Efficient Dominant Strategies

### Box 1. Impossibility of Implementing Ex-Post Efficient Dominant Strategies

### Mechanism design problem in cross-border supervision
- Individuals (national supervisors and other agents) hold private information signals θi drawn from a prior distribution; supervisors maximize expected utility with Bernoulli utility u_i(x, θ_i).
- Collective choice function f: Θ1×...×ΘI → X assigns a resolution x = f(θ1,...,θI) based on the full information profile θ = (θ1,...,θI).
- Ex-post efficiency defined: for no θ does there exist x∈X such that u_i(x, θ_i) ≥ u_i(f(θ), θ_i) for every i, and u_i(x, θ_i) > u_i(f(θ), θ_i) for some i.
- Dominant strategy implementation desirable because it is robust to incorrect or contradictory beliefs about information distributions.

### Impossibility result (Green and Laffont, 1979)
- Statement: If the set of possible information signals is sufficiently rich (as in major cross-border bank failures), then no collective choice function that is implementable in dominant strategies is also ex-post efficient.
- Construction in the Box:
  - Resolution alternative x is a vector x = (k, t1,..,tI), where k∈K and ti are monetary transfers between national economies.
  - Assume for each supervisor i = 1, ..., I that {v_i(·, θ_i): θ_i∈Θ_i} = {all possible valuation functions from K to ℜ}, i.e., every possible valuation from K to ℜ arises for some θ_i∈Θ_i.
  - Even allowing transfers with ∑_{i=1}^I t_i(θ) = 0 and requiring k*(θ) to satisfy ∑_{i=1}^I v_i(k*(θ), θ_i) ≥ ∑_{i=1}^I v_i(k, θ_i) for all k∈K, there is no mechanism (including burden sharing) implementable in dominant strategies that yields ex-post efficiency.
- Implication: With self-interested national accountability and private information, no credible mechanism ensures supervisors can reveal private information without potential national cost; efficiency requires collective joint responsibility and accountability, including collective crisis cost minimization.

### Consequences for moral hazard and perceived safety nets
- Resulting weakness: no credible threat of business exit for LCFI in Europe, producing moral hazard; perception that troubled systemic institutions would receive direct or indirect solvency support (Fonteyne, 2007).
- Political and economic costs of closure and relatively low deposit protection increase likelihood of implied support; capacity of present deposit insurance arrangements likely insufficient.

### Policy implication from Box 1
- What is needed: collective (joint) responsibility and accountability of national supervisors; commitment to EU-wide crisis cost minimization to enable efficient revelation of private information and ex-post efficient outcomes.

---

### Excerpts connected to the EBC proposal (context provided by document)

### Rationale linking Box 1 to the EBC
- For the single regime to work, it is key to establish joint responsibility and accountability of European supervisors for EBC-chartered banks, built on a commitment to EU-wide bank crisis cost minimization (Box 1 referenced).
- Supervision under the EBC could be carried out by national supervisors with a specific European mandate and accountability to the European Parliament; complete EU-wide financial stability arrangement proposed: harmonized supervisory powers and practices, uniform prudential regulation, a single deposit insurance scheme, and ideally an EBC-specific bank insolvency regime.

### Key organizational and implementation points (as presented)
- The EBC would be available in each participating EU member state and consist of a single prudential regime—effectively a 28th regime.
- Neutral treatment of legal form: branches and operationally-integrated subsidiaries treated the same for prudential purposes; conversion into a European Company suggested as one way to achieve neutrality.
- Freedom of choice: banks choose between EBC and national charters; mandatory application to a subset (e.g., systemically important banks) rejected due to level-playing-field concerns and difficulties defining “systemically important.”
- Likely implementation route: EU regulation (directly applicable and binding) preferred over EU directive.
- Supervisory organization example: “hub and spokes” with national supervisory teams for each LCFI, reporting to all national supervisors and decision-making by qualified majority voting when disagreements arise; joint accountability to the European Parliament.

---

### EBC features, attractions, and issues linked to Box 1 themes

### Features (concise)
- Single prudential regime for participating EU member states (a 28th regime).
- Neutrality between branches and subsidiaries; conversion to a European Company as an option.
- Freedom of choice between EBC and national charters.
- Joint responsibility and accountability; EU-wide financial stability arrangements (harmonized powers, uniform prudential rules, single deposit insurance, possible EBC insolvency regime).

### Attractions (enumerated)
- Cost savings for taxpayers through elimination of supervisory duplication and plugging gaps.
- Cost savings for cross-border institutions and customers via a single supervisory/regulatory framework.
- Level playing field across Europe without arduous top-down harmonization of national prudential policies and insolvency laws.
- EU-wide financial stability framework resolving tension between integration and domestic accountability (joint responsibility/accountability delivers prevention, management, and resolution mechanisms and savings for taxpayers).
- Regulatory framework attuned to business needs with streamlined supervision and reporting; customers can choose pan-European or national institutions.

### Issues and constraints (enumerated)
- Centralization vs decentralization: need to balance decentralized local knowledge with level playing field and EU-wide financial stability concerns; the small subgroup of institutions that account for less than 1 percent of European financial institutions by number but a majority of EU banking assets creates the tension.
- Funding supervision: heterogeneity across countries (industry-funded in some, budget-funded in others). Industry funding at EU level would make migration less attractive for institutions currently not paying fees; migration of funding can reduce attractiveness for industry-funded regulators.
- Funding financial crisis resolution: shared supervisory responsibility implies sharing crisis costs; essential principle: arrangement must prevent countries from walking away when collective-cost-minimizing solutions impose higher costs on some countries. Need for ex-ante arrangements likely required.
  - Deposit insurance as a starting point: EU-wide deposit insurance funded by industry may be politically preferable but must be calibrated; deposit insurance operator may need the ability to issue bonds backed by full-faith guarantees of participating countries, implying burden sharing among countries if banks fail to replenish the scheme.
  - Public support instruments (e.g., guarantees, bridge bank schemes) complicate sharing of contributions across countries.
  - Transparency, emphasis on exit as disciplining device, and a stronger prudential toolkit could limit crisis costs.
- Insolvency: absence of pan-European bank-specific insolvency regime; divergence between treatment of branches (home country responsibility under Winding Up Directive) and subsidiaries (host country proceedings) undermines single economic-entity view and may raise collective crisis costs; requiring European Company conversion could ease creation of EU insolvency regime, or insolvency regime could be added later with risks to crisis cooperation.
- Regulatory competition: multiple charters may introduce competition; risk of “race to the bottom” vs benefits of competition (market test, innovation). Calibration of EBC critical to ensure major banks have incentive to sign up; mandatory EBC for LCFIs unattractive for level-playing-field reasons.

### Alternatives (brief)
- Lead supervisor concept (authority rests with home supervisor) criticized for neglecting host-country financial stability concerns.
- Develop and reinforce MoU framework; some regional examples (Nordic countries) have expanded MoUs: (i) general MoU among five Nordic supervisors; (ii) institution-specific MoUs for Nordea and Sampo groups; (iii) MoU on crisis management among five Nordic central banks.
- Other alternatives include single European supervisor or reinforced Lamfalussy structure; full reliance on market disclosures and market discipline regarded as unrealistic in current EU setting.

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*Source: _wp07173 - Box 1. Impossibility of Implementing Ex-Post Efficient Dominant Strategies (excerpts from the provided IMF content).*

### Appendix I provides some details on

### REFERENCES

### REFERENCES

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*Content extracted from _wp07173 - REFERENCES*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2007/_wp07173.pdf_