Elisabetta Montanaro

The Unified European Banking Market and the Convergence of National Banking Sectors

The rationale for public regulation springs from the need to overcome the more severe effects of some form of market failures. However, regulation is costly and may produce unwanted negative side effects. A public framework of regulatory measures needs to be justified on the ground of net gains for the community. Since real economic systems with market and co-ordination failures do not possess the well-behaved conditions required for the Pareto optimality, these systems are the locus of conflicting interests that do not permit us to define an objective or generally accepted social welfare function. The evaluation of the potential net benefits accruing from a regulatory framework is then determined by structural and political aspects of economic societies, therefore possessing country-specific characters and being subject to change with the passing of time. Different traits in the morphology of financial systems are clearly per se causes and consequences of differences in their regulatory frameworks. On the contrary, international relations and technological progress are powerful agents pushing towards harmonisation, if not towards convergence. Whether economic development is conducive to a single structural model (structural convergence) it remains one of the hot topics for historians and theoreticians of financial systems. The countries now belonging to the European Union (EU) experienced quite distinct secular evolutions in their financial systems and in their financial regulatory frameworks. For more than twenty years these countries have been facing an increasingly rapid process aiming at the creation of a common financial market and the harmonisation of their regulatory schemes.

The Second Pillar of Basel 2: Stressing banks or supervisors?

The paper focuses on Basel 2s Second Pillar, showing how the shortcomings of its design crucially render the whole framework ineffective. Although a principlesbased regulation gives ample discretionary powers to supervisory authorities, a regulatory methodology based on fine measurement of risks is not consistent with an arms-length supervision. Supervisors are inevitably captured by industrys practices and evaluations, especially those of large and complex financial institutions. Furthermore, stress testing aimed at capturing really extreme events would rise regulatory costs without significantly increasing systemic resilience and would make the international level playing field disappear.