In this paper, the consequences on financial stability of the institutional design envisaged
in the Maastricht Treaty – which implicitly assigns the objective of financial stability
to the National Central Banks (NCBs) – are assessed. The Maastricht Treaty spells out
precisely the role of the European Central Bank (ECB) and NCBs within the European
System of Central Banks (ESCB) as to achieve the objective of price stability, but it is not
equally clear as far as the objective of financial stability is concerned. In an area like EMU
with a high degree of financial and economic integration, the actions undertaken by NCBs
in the fields of regulation, prudential supervision and Lending of Last Resort are characterized
by relevant externalities across jurisdictions. The present institutional design does
not allow EMU to benefit from the internalization of these spillovers since NCBs do not
face incentives to undertake properly banking policy activities. Applying the principle of
subsidiarity to the problem of power sharing between ECB and NCBs, the following suggestions
for a revision of the institutional design are obtained: i) ECB should be assigned
the task of coordinating regulation activities to avoid regulatory arbitrage, while prudential
supervision should be managed jointly in a two-tier system by ECB and NCBs; the decision
process pertaining the use of discount window and the Lending of Last Resort function
should be centralized; ii) the rules pertaining the working of TARGET and EMS 2
should be changed in order to limit the risk of a financial crises imported from pre-ins
countries