Financial markets have increasingly grown cross-border, this having important implications for the design and conduct of prudential regulation and the provision of safety nets, such as deposit insurance or crisis management structures (lender of last resort operations).

The financial crisis has evidenced a number of weaknesses specific to cross-border banking. The study of regulation on the basis of recent cases of banking failure during the crisis allows developing conclusions about the evolution of cross-border banking and the challenges present in the current EU regulatory and supervisory framework. In particular, attention is paid to the impact that legal structures used in cross-border banking may have on financial stability.

This paper analyses the way in which cross-border banking has evolved during the last years, focusing on the legal structures and their impact on competition and financial stability. Thought is given to the specific changes in regulation and supervision that may lead to sustainable cross-border banking within the EU. Finally, the current EU regulatory proposals as well as the changes in the EU supervisory architecture are critically analysed, and final conclusions are drawn on the way forward.