The Financial Trilemma

The financial trilemma states that financial stability, financial integration and national financial policies are incompatible. Any two of the three objectives can be combined but not all three; one has to give. This paper develops a model to underpin the financial trilemma. The authors' findings for financial integration suggest that the financial trilemma is in particular at work in Europe. The 2007-2009 financial crisis highlights the need to manage financial stability. The question is how they can achieve financial stability in a world of cross-border banking.