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The Impact Of Cross-Border Banking On Financial Stability

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Executive Summary

This paper focuses on the stability aspects of cross-border banking. The authors first argue that cross-border banking brings about various benefits and costs for financial stability. Based on this, they draw conclusions for the desirability of cross-border banking in the EU, and derive implications for its optimal form. Next, they derive metrics that allow quantifying whether cross-border banking in a country (or region) takes a desirable form and apply these metrics to the EU countries. Their results suggest that the countries with the largest banking centers, UK and Germany, are well diversified. By contrast, the New Member States (NMS) are highly dependent on a few West-European banks and thus vulnerable to contagion effects.

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