Banking union under construction: The impact of foreign ownership and domestic bank internationalization on European Union member-states’ regulatory preferences in banking supervision

Abstract

What is the optimal scope of regulatory harmonization in European financial sector governance? I argue that the levels of foreign ownership and domestic bank internationalization are important determinants of the extent to which governments are prepared to endorse European solutions in banking supervision or prefer national ones. I test two hypotheses about the impact of foreign ownership and domestic bank internationalization on regulatory preferences. This article shows that being a host jurisdiction to foreign financial institutions constrains states’ ability to steer credit flows and tackle perceived threats to national financial stability. As a consequence, decision-makers seek to preserve some national regulatory autonomy. Especially during economic downturns, national supervisory authorities have strong incentives to pursue policies that minimize losses for domestic stakeholders and shift burdens onto foreign ones.