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In the United States and the European Union (EU), political incentives to oppose cross-border banking have been strong in spite of the measurable benefits to the real economy from breaking down geographic barriers. Even a federal-level supervisor and safety net are not by themselves sufficient to incentivizing cross-border banking although differences in the institutional set-up are reflected in the way the two areas responded to the crisis. The U.S. response was a coordinated response, and the cost of resolving banks was borne at the national level. Moreover, the Federal Deposit Insurance Corporation (FDIC) could market failed banks to other banks irrespective of state boundaries, reducing the cost of the crisis to the U.S. economy and the sovereign finances. In the EU, the crisis resulted in financial market fragmentation and unbearable costs to some sovereigns. Moreover, the FDIC could market failed banks to other banks irrespective of state boundaries, reducing the cost of the crisis to the U.S. economy and the sovereign finances. In the EU, the crisis resulted in financial market fragmentation and unbearable costs to some sovereigns.

Financial institutions are now crossing national borders within the EU. In balancing member states' desires for sovereignty against the effectiveness of the financial safety net, banks are currently all chartered by Member States and the safety net remains largely the responsibility of individual national governments. The paper questions whether minimally harmonized national safety nets and reliance on voluntary cooperation can keep EU banks safe and sound and prevent financial contagion. The paper examines a number of proposed remedies and recommends enhancing market discipline and adopting a system of prompt corrective action and least‐cost resolution to minimize the incidence of bailouts. (JEL F36, G18, G21)

We analyze the takeover premiums paid for a sample of European bank mergers between 1997 and 2007. We find that acquiring banks value profitable, high-growth, and low-risk targets. We also find that the strength of bank regulation and supervision and of deposit insurance regimes in Europe has measurable effects on takeover pricing. Stricter bank regulatory regimes and stronger deposit insurance schemes lower the takeover premiums paid by acquiring banks. This result, presumably in anticipation of higher compliance costs, is mainly driven by domestic deals. Also, we find no conclusive evidence that bidders seek to extract benefits from regulators either by paying a premium for deals in less regulated regimes or becoming too big to fail.