As well known, the East Central European (ECE) countries are an exception in the EU in that most of their major banks are foreign-owned. As the recent financial crisis has shown, this has exposed the region to a number of risks. In light of their dependency on foreign banks and home country regulatory policies, one would expect the ECE countries to strongly support supranational supervision of their banks. Yet, many countries in the region express little enthusiasm for recent European initiatives. The paper explores the reasons for this. It argues, first, that the reluctance of the ECE countries to support EU-level bank regulation is driven not so much by their desire to preserve national autonomy of their financial systems, but by the perceived costs of different forms of supranational regulation. ECE states have already relinquished a large portion of their autonomy in this regard by allowing foreign banks a free hand in determining their lending policies, and relying on the home country regulators to rescue the ailing banks, together with their ECE affiliates during the crisis. Second, we argue that while this free-rider/firefighter model of bank governance carries a degree of risk, the costs of centralized supervision are also not negligible. On the one hand, macro-prudential rules stipulated by the EU authorities suggest a more conservative lending environment which could result in deleveraging, weaker credit growth and higher costs of finance in the capital-poor New Member States. On the other hand, depending on how the question of bank resolution is finally addressed within the European banking union, the host governments may also be expected to assume more fiscal responsibility for the flagging banks, something that so far they have been successfully able to avoid. The paper will be based on two case studies, Hungary and Romania.
