The conundrum of solving ‘too big to fail’ in the European Union: supranationalization at different speeds

Abstract:

In the aftermath of the international financial crisis, the European Union (EU) adopted a series of regulatory reforms concerning capital adequacy, bank structures and resolution in order to tackle the risks created by financial institutions that were ‘too big to fail’. This article demonstrates different degrees of progress towards a supranational framework in two important areas of reform: Limited harmonization of the rules on bank structures, but robust progress toward the supranationalization of bank resolution, where the euro area dimension is also considered.

What accounts for this variation? We draw on a synthesis of neofunctionalism and liberal intergovernmentalism to explain the diverging outcomes. We explain the low supranationalization in bank structural reforms with the absence of strong spillovers and availability of domestic options to unilaterally contain financial instability. In bank resolution, we examine the causal mechanisms through which significant spillovers modified the government preferences of key Member States.