The Rise and Stall of EU Macro-Prudential Policy. An Empirical Analysis of Policy Conflicts over Financial Stability, Market Integration, and National Discretion*

Abstract

The 2007–09 financial crisis appeared to demonstrate the need for a strong, supranational EU macro-prudential policy framework to prevent similar future disasters. The implemented framework, however, is neither. It is highly complex, involving many constraints on the use of macro-prudential instruments. It is also one of the principal areas of national discretion in EU banking regulation. To explain this, I build on the ‘financial trilemma’ thesis which holds that there are inherent tensions between pursuing financial stability, financial integration and national financial policies. Supranationalizing macro-prudential policy proved difficult due to a lack of consensus on how to measure systemic risks and because of the distributional consequences involved. This increased the tension between stability and integration, as national macro-prudential policies could constrain cross-border finance and they could be misused for competitiveness considerations. Key policy actors disagreed on which goals to prioritize, with bargaining leading to a convoluted policy framework.