Bailouts without borders

September 28 saw the successful rescue of Franco-Belgian bank Dexia, followed two days later by a huge cash injection into Benelux rival Fortis. Such bailouts are common enough in the current financial to seem routine, but these two were notable for their multinational character. Belgium, Luxembourg and France co-operated in the first; Belgium, Luxembourg and the Netherlands in the second.

Not all banks require such treatment -- retail banking is still largely a national affair -- but transnational financial institutions are common in the suffering wholesale and commercial sectors. Europe’s largest banks hold nearly a quarter of their assets outside their home country, and many have liabilities larger than the GDP of their home countries -- making the need for cross-border rescue systems more pressing. Without a central European bank regulator or lender of last resort, responses to a national crisis must come for now from national authorities. Efforts by the European Commission to change that status quo are years from coming fruition. 

However, this might be tricky to orchestrate in less culturally and economically integrated countries than the Benelux. Seeking higher returns, many Western European banks have set up shop in newer EU members to their east. If banks’ operations in those countries run into trouble, host governments may be unwilling (given cultural difficulties) and unable (given the fiscal constrains they face) to bail them out. The limits of transnational co-operation will be then be exposed.