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European Financial Regulation’s Wrong Turn

The European Union, heeding calls for more effective financial regulation, has just unveiled a plan for a new pan-European watchdog. But, by retaining the principle that financial institutions' home countries are responsible for regulating their activities in other EU countries, the plan may threaten decades of integration by encouraging host countries to re-impose capital controls.

London – With the crisis in financial systems around the world reflecting massive regulatory failures, calls for more and better oversight abound. Such appeals were heard again at the G-20 meeting in Pittsburgh, and the European Union has just responded, unveiling a plan for a new pan-European watchdog.

In a globalized financial system, striking the right balance between home and host country jurisdiction, and between national and supranational oversight, is crucial.  Look at Europe. European financial institutions and markets cross national borders on an unprecedented scale, but national authorities still dominate regulation. Addressing the European problem may help us find solutions to the global challenge.

The EU’s current model – the “single passport” with home-country regulation of financial institutions – has failed on an embarrassing scale. The Baltic economies are perhaps the most tragic victims, but the damage stretches across Central and Eastern Europe and down into the Balkans. After the devastating impact of the crisis on their economies, countries hosting Western banking subsidiaries and branches cannot be expected to accept the status quo .

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