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Cross-border banking in Europe:Policy challenges in turbulent timesThorsten BeckTilburg University and CEPRThe ongoing sovereign debt crisis in Europe continues to put strain not only onbanks’ balance sheets, but also on the single European banking market. Rather thandisentangling the sovereign debt and bank crises, recent policy decisions might havetied the two even closer together. The use of the additional liquidity provided throughLTROs to stock up on government bonds by some banks has has certainly had this effect.Moreover, while first steps have been taken to address sovereign debt illiquidity andself-fulfilling prophecies of sovereign insolvency, there are still no proper mechanismsin place to address either.Last June, CEPR published a policy report titled Cross-border banking in Europe:implications for financial stability and macroeconomic policies (Allen et al 2011) inwhich the authors argued that policy reforms in micro- and macro-prudential regulationand macroeconomic policies are needed for Europe to reap the important diversificationand efficiency benefits from cross-border banking, while reducing the risks stemmingfrom large cross-border banks. While the authors finalised this report in April 2011, theorganised default by Greece and the continuing doubts over the debt sustainability ofPortugal and concerns over some other peripheral states have reinforced the messagesin the report. The ongoing crisis has also reinforced regulatory instincts to focus onnational interests and stakeholders when it comes to cross-border banking.85