Multinational banks, while potentially contributing to the efficiency of the banking sector, represent a challenge from a regulatory and supervision perspective, predominantly due to coordination failures among national supervisors.

The institutional response, spurred by the recent global financial crisis, has been broad and profound, with very ambitious and substantial developments, such as the Single Supervisory Mechanism of the European Banking Union.

These developments represent major changes in the organization of cross-border banking supervision and will have profound implications for the industry, worldwide.

In this paper, we:

• Investigate whether and how the banking system itself will strategically adapt to such a drastic overhaul of the supervisory architecture;
• Illustrate cases in which this endogenous reaction of the industry may lead to unintended and probably unexpected consequences, such as higher costs for deposit insurance funds and negative impact on welfare;
• Claim that policy reforms should anticipate and track multinational banks' reactions, a moving target.