Therefore, I will not discuss the problems arising from institutions being “too big to fail” but instead focus on how we can best deal with problems arising from cross-border banking activities. From a policy perspective, the key problem with cross-border banking is that the regulatory framework for ensuring financial stability has not been adapted to market developments as quickly and as thoroughly as needed. While financial markets have developed beyond national borders, the current legal and institutional frameworks – including regulation, supervision, deposit insurance and crisis resolution – remain national. The complexity of this problem has aptly been described as the European Financial Trilemma, meaning that the three objectives of global financial stability, financial integration and national financial independence cannot be achieved at the same time. 19 So far, EU member states have chosen to prioritise financial integration and to safeguard national powers. Until the financial crisis, this combination seemed to work well, but only because the financial safety nets were not really put to the test. In connection with the financial crisis, however, policy makers have been forced to realise that financial stability and financial integration cannot be achieved in combination with strictly national policies. And since the costs of financial instability have proved to be too high to be acceptable, a choice between the latter two has to be made. In this context continuing to safeguard national independence would imply closing borders to foreign financial institutions.

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