For example, proposals such as prohibiting foreign branches from doing business domestically or extending home-country responsibility have been discussed. My take on this, as I said in the beginning, is instead to gradually move towards the creation of a common international body with a mandate to conduct supervision of banks with substantial cross-border activities. The simple rationale is that the creation of such a body is the only way to fully manage the conflicting national interests. Also, such a body would have several other benefits. A single authority supervising cross-border banking groups instead of several would most certainly increase the comprehensiveness and the effectiveness of the supervision. For the firms subject to supervision, it could mean that the regulatory burden would eventually be reduced considerably. In a European context, the idea of a European Organisation for Financial Supervision (EOFS) may at a first glance seem overly idealistic, and to be honest, in some respects it is. One can argue that it would be virtually impossible to make countries give up parts of their sovereignty to a supranational authority. However, looking at this from a European perspective, there is hope. Within the European Union there is already a framework for supervisory and regulatory cooperation, based on the common legislative process in the form of EEC-directives and regulations. Moreover some institutional arrangements for supervisory cooperation are in place, even if they do not have any legal powers. It may therefore be easier to reach some progress in Europe than elsewhere in the world.

National authorities have – or could be given – sufficient power to act. When environmental pollution crosses national borders, containing the negative externalities becomes more difficult, since the national authorities only have national mandates. Then some kind of supra-national organisation or some form of cross-border agreement may be required. Similarly, in the financial area, as long as the externalities are limited to one nation, the domestic authorities can – at least potentially – be used to internalise the problems. Thus, when banks start becoming important in several countries, there will be a mismatch between the potential problems and the roles of financial supervisors and regulators. In the prevailing regulatory structures there are very few arrangements for supervision and crisis management designed for managing externalities with cross-border impact. Given that the financial markets get more and more integrated the lack of adequate cross-border regulatory structures creates a number of challenges. Challenges One challenge is that the interdependence between different countries increases. Problems in the banking system in one country are more likely to spill over to the other countries where the bank or group is active. The cross-border contagion effects are likely to be larger as banks are actively involved in several countries. This can be illustrated by one of the largest banks in my country, Nordea. It has substantial activities in four of the Nordic countries, and is also a significant part of the financial system in all these countries. Any serious problem in Nordea will therefore most likely affect all four countries.