With that, expanding SMEs, for example, could gain easier access to risk capital and incur lower financing costs, in the same way that a more evolved and integrated market for corporate bonds has led to a lower cost of capital for large companies. Consumers, too, would benefit from lower borrowing costs and access to a broader range of financial services. Moreover, both companies and households would have better opportunities to diversify risk. Better use of scale economies should also mean less expensive and more secure ways to pay for goods and services. So, with all these potential efficiency gains, it is clear that further integration of the markets for financial services is vitally important, if we are to succeed with the Lisbon agenda and improve growth in Europe. And this is also the prime reason for the Financial Services Action Plan, which was launched a few years ago. However, at the same time as the financial system is important for growth in the real economy, it is also inherently unstable. In particular, banks could be prone to bank runs due to the liquidity imbalance between their assets and their liabilities. This inherent instability is an important reason for the existence of financial regulation, supervision and macro-prudential oversight of financial firms in the first place. The costs to society from a bank failure could be enormous due to potential contagion to other financial companies, thus posing a threat to the financial system as a whole.
A basic challenge for the authorities dealing with cross-border banks is how to find an acceptable formula for sharing the burden and the costs of a crisis. Goodhart and Schoenmaker have in their paper suggested a number of keys that could be explored to create such a formula, for example the relative size of GDP, the ECB capital ratio, and the relative amount of bank assets in the country. As pointed out by Goodhart and Schoenmaker, the first question to be asked is whether one would want a general solution where all countries contribute according to some fixed key, or more specific burden sharing arrangements, where only the directly involved countries participate according to a more flexible key, presumably taking into account the geographic spread of the bank’s business. To achieve the latter, it would be necessary to find some commonly agreed criteria for assessing a bank’s systemic relevance to the financial system of a country. Merely using market shares as a criterion will probably not be adequate as other aspects, such as the bank’s relevance to the payment system, clearing and settlement, involvement in inter-bank securities markets and so on would also be important in this respect. At the same time, in a constantly changing banking landscape, it would be difficult to find criteria that are so clear-cut that assessments will not be “up for negotiation” in a sharp crisis scenario.