In the aftermath of the international financial crisis, policy-makers in the European Union (EU) singled out three areas of policy reform as particularly important in order to tackle the risks created by financial institutions that are “too big to fail”: (1) capital requirements, (2) bank resolution regimes and (3) rules on banking structure. This paper examines the dynamics of composite policy reforms in these three areas by focusing on the degree of supranationalisation, meaning the setting up of new EU institutions, the transfer of powers and competencies from the member states to the EU and the harmonization (minimum or maximum) imposed by the new rules. It is argued that progress towards a coherent supranational framework and the degree of supranationalisation vary across the three areas, ranging from extensive supranationalisation in the realm of capital adequacy standards to very limited supranationalisation in banking structural reforms. There is also an important euro area dimension related to the new institutions and rules in the construction of Banking Union. What accounts for this variation? We rule out political explanations based on the salience of reform for the broader public and the ideology of the governing political parties or coalitions. We argue that financial interconnectedness and vulnerability to developments in the international financial system and in the euro area led to greater supranationalisation. By contrast, there was limited progress toward supranationalisation in areas where member state policy-makers had greater capacity to insulate the domestic banking system from international vulnerabilities.
