The deep involvement of a number of euro-area banking groups in central and southeastern
Europe has benefi tted the host countries and has strengthened the resilience of
those banking groups. But this integration has become less close because of post-financial
crisis national rules that require banks to hold more capital at home, or other ring-fencing
measures. Th ere is a risk integration might be undermined further by bank resolution
planning, which is now gathering pace.
Regulators and banks will need to decide between two distinct models for crisis
resolution, and this choice will redefi ne banking networks. Most effi cient in terms of
preserving capital and the close integration of subsidiary operations would be if the Single
Resolution Board – the banking union’s central resolution authority – takes the lead for the
entire banking group. However, this will require parent banks to hold the subordinated debts
of their subsidiaries. Persistent barriers to intra-group capital mobility – or the option for
home or host authorities to impose such restrictions – will ultimately render such schemes
unworkable.
The second model would involve independent local intervention schemes, which
European Union countries outside the banking union are likely to call for. Th is will require
building capacity in local debt markets, and clarifying creditor hierarchies. Exposure to
banking risks will ultimately need to be borne by host-country investors. Bail-in capital issued
by subsidiaries to their parents cannot be a substitute because it would expose the home
country to fi nancial contagion from the host.
To sustain cross-border linkages, banking groups and their supervisors will need
to make bank recovery plans more credible, and to strengthen cooperation in resolution
colleges (platforms that bring together all relevant parties in resolution planning and
execution). Within the banking union there is no justifi cation for the various ring-fencing
measures that have impeded the fl ow of capital and liquidity within banking group
