The impact of macroprudential policy on financial integration

Welfare effects of cross-border cooperation are well understood today. The European Union provides clear evidence of how successful economic integration can also pave the way to a deeper political and social community. However, the financial crisis that began in 2007 has put at risk the achievements made over the preceding 60 years of European integration. It has underlined the fact that integration and contagion are two sides of the same coin. To prevent such a severe crisis from happening again, financial regulation has to be broadened through the addition of a macroprudential approach. Moreover, the impact and persistence of the financial crisis were also a result of insufficient financial integration, leaving room for national maneuvering which proved unsustainable for Europe as a whole. The forthcoming European banking union, which empowers the European Central Bank with both micro- and macroprudential competencies, is thus a major step toward safeguarding financial stability. At the same time, national competencies are, to some extent, indispensable to account for heterogeneity among EU Member States. They are an essential factor in contributing to the respective country’s stability as well as in assuming responsibility for the well-being of its peer countries. Deeper integration and national responsibilities are thus not mutually excluding. However, the two-layer structure of the European regulatory framework entails the risk of elevated complexity and will come with a need for intensified cooperation.