In my country we have painful experiences of a banking crisis that occurred partly because the new deregulated environment posed new challenges for banks as well as for regulators; challenges they were not prepared for. Eventually banks developed more appropriate risk management techniques and supervisors adopted a more risk- and process-oriented form of supervision rather than the previous rather formalistic type. This has clearly lowered the risk of financial crises. Internationalisation of banking Also after the deregulation, most banks have remained predominantly national. Only in the last decade have we seen the emergence of some big cross-border banks with major activities in several countries. And this financial integration is accelerating. Let me here be perfectly clear. This development is positive for the economy. It stimulates competition and product development across countries. It also means that the banks can profit from economies of scale and scope. The spread of cross-border banking has reached different levels in different parts of the world. In Europe it has been increasing rapidly in the last few years, but there are also several active cross-border banking groups here in the Pacific region. This integration is not without challenges. In particular supervision and crisis management arrangements have to be addressed hopefully with some foresight, before we get another crisis. To explain this allow me to draw a parallel to the perhaps most burning issue in contemporary debate; the problem of global warming and climate change. The challenges of financial integration share some of the same characteristics as the environmental problems facing us.

Still, even in Europe, it is not very likely that a full fledged Pan-European supervisor can be established in the near future. Therefore, my proposal should be seen as a gradual process rather than a fast-track to a European FSA. Institutional set-up and powers of EOFS Let me now go into more detail on how the EOFS would work. As I said earlier, the mandate of the EOFS would be to perform a form of supervision of the major cross-border banks at the European level. As the focus is strictly on prudential supervision, the supervisory tasks related to market conduct and consumer protection would still rest with national supervisors. Aligned with the EU-principle of subsidiarity the supervisory duties of the EOFS should only include the banks with major cross-border activities. What I have in mind is a three layered structure. The 8000 or so European banks which mainly operate domestically would remain under the exclusive competence of national authorities. The regionally oriented banks, active in a few countries, could use a structure similar to that of today, where supervisory colleges deepen the cross-border cooperation. The limited number of truly Pan-European banks would on the other hand be dealt with by the EOFS. 4  BIS Review 83/2007  In the first step the tasks for the EOFS, would in my view, be threefold: Firstly, it should gather information about the cross-border active groups. Secondly, with the information acquired, unified risk-assessments should be produced for the banks subject to EOFS supervision.