In that case, national authorities would licence domestic banks that would face significant restrictions on the type and magnitude of cross-border activities they would be allowed to undertake; for instance, by limiting the size of foreign currency balance sheets and maturity mismatches and not allowing collection of foreign currency deposits in foreign branches. These banks would then be supervised by the national supervisor, their deposits would be insured by the domestic deposit insurance system, and the national central bank would be their LOLR. Those banks that want a European passport would be licensed and supervised by an EU authority, however; they would be part of an EU-wide deposit insurance system, and in most cases, their LOLR would be the ECB. Let me now say a few words about the national level. The key issue here is that, as long as global risks and EU flaws are not dealt with, individual countries are forced to take action to protect themselves: action that might contribute further to the retreat of cross-border banking. These might take the form of restricting international activities of home banks and placing much more strict prudential limits on foreign currency maturity mismatches. For example, when Iceland lifts its current capital controls on outflows, it will probably impose restrictions on both the size and composition of foreign currency balance sheets of home-headquartered banks. Some might see such restrictions as capital controls in another form, but I see them as prudential rules.
The swap lines are not at present a permanent and a reliable feature of the international monetary system; for instance, they have been strongly challenged in political discussion in the US. Furthermore, there are important unresolved governance issues, such as who should decide which countries get a swap line and which do not. It is thus an important item on the reform agenda to clarify the extent to which standing foreign currency LOLR facilities for solvent cross-border banks can be set up. In the meantime, cross-border banking will retreat because of this risk, and smaller countries in particular will be more reluctant to provide a home base for cross-border banks. BIS central bankers’ speeches  1  Let me now move to the EU/EEA level. Here the main fault line is the contradiction between, on the one hand, the area-wide permission to operate based on home licensing and a common regulatory framework (the European passport) and, on the other hand, national supervision, a national safety net of deposit insurance and LOLR, and national crisis management and resolution regimes. The underlying principle is the same as in many other areas of the EU: an equal and harmonious competitive position throughout the area. In that ideal world, the location of headquarters and the size of a banking system relative to that of a country should not matter. The crisis revealed that this framework is deeply flawed. First, it ignores the FX liquidity risk that I discussed earlier.