hand, and the uk and the netherlands, on the other, began in october 2008 when landsbanki failed and was placed into receivership by the icelandic financial supervisory authority and the icelandic government made clear that it would not compensate depositors in the uk and the netherlands with icesave accounts. the british and dutch governments unilaterally decided to refund savers in their respective countries. thereafter they entered into negotiations with the icelandic government demanding repayment of the refunds corresponding to the eu guarantee. still today no agreement has been reached. it is a general phenomenon that firms with foreign operations tend to be relatively big and this phenomenon can be explained as the outcome of a selection process where only the most productive firms find it profitable to pay the sunk fixed costs associated with entering new markets through foreign affiliates ( see e. g. helpman, melitz and yeaple, ( 2004 ) ). operations that are the problem. 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. such an option would not only be extremely costly, but also strike a serious blow at the very heart of european integration – the single market. restrictions on operating abroad through branches has been proposed as a possible way

its operations. what this means for the banks in the end, as for the rest of us, is that they must try to earn more money than they spend and have sufficient reserves to cope with the periods when they don ’ t. the banks manage this by constantly assessing the risk that a borrower will experience difficulties in meeting interest payments or paying off the loan. if this risk increases, the bank leaves a good margin for it by adjusting its lending or allocating reserves for potential losses. but as borrowers are affected by so many factors that are difficult to judge – for instance, economic recessions have very different impacts on different sectors and geographical areas – it is easy for the bank ’ s losses to become larger than expected. the minimum capital required by the regulations should act as a buffer against such unexpected losses. it is necessary for everyone to be convinced the bank will survive in order for it to survive. if the bank is perceived as unsteady, the supply of money will be cut off. a lack of sufficient capital buffers can easily shake confidence in the bank. and this was exactly what happened when the crisis loomed large. people were uncertain how badly off the banks were. no one knew how large the losses would be and whether the reserve capital would suffice. funding ran short. because what financiers in the market would want to give loans to a bank that appears unsteady? and who would want money in an account in this bank? i am sure you will remember the pictures of the queues outside northern rock ’ s branches in the united kingdom. to restore confidence, the state and the taxpayers in many countries had to inject capital and go in as owners of the banks. this would not have been necessary if the banks had held more capital when the dark storm clouds gathered in summer 2007. the basel committee has taken note of this. the current capital requirements are being raised substantially. if i may go into technical details, the new regulations require that the banks should have a tier 1 capital corresponding to at least 6 per cent of their assets, or more correctly their risk - adjusted assets. the risk adjustment means that for each asset one recalculates the value, depending on whether the value of the asset can be regarded as certain. one sign of this might be, for instance, that the value of the asset has varied a lot. the higher risk an asset is believed to entail, the more capital needs to be allocated. at present,