Differentiated Integration in the Eu's Banking Market: Empirical Analysis

This paper combines three different datasets to analyze empirically the varieties of banking regulation across the member states of the European Union. It points out that national designs of banking regulation as well as supervision differ considerably as member states utilize the flexibility provided by the EU legislation. The most robust pattern of differentiation is between the old and new/post-communist member states. The data also suggest that the difference can be explained by the desire of national authorities in the new member states to protect capital and liquidity in the local subsidiaries of foreign-owned banks that dominate their banking sectors by relying on the more stringent and less discretionary interpretation of the EU legislation. This persistent differentiation undermines the commitment to the harmonized regulatory and supervisory framework for the single market and the banking union. It also provides empirical demonstration of the extent of differentiated integration across the EU's banking market.