[11] But the supranational levels has an equally important responsibility for financial stability. The national level might act too late if risks to financial stability emerge, and it may insufficiently take cross-border spillovers of risks to financial stability into account. The supranational level thus plays an important role in monitoring spillovers, ensuring best practices, and establishing effective mechanisms to mitigate a potential inaction bias.
Spillovers of financial stability risks across borders provide a strong rationale for supranational cooperation (Cecchetti and Tucker 2015). Risks to financial stability do not stop at national borders. Exposures to common shocks and cross-border activities of financial institutions, but also regulatory arbitrage can lead to spillovers of risk. During the global financial crisis and the European sovereign debt crisis, shocks quickly transmitted across borders.