A Simple Prudential-Effort Foundation for the Financial Trilemma

Charles Nolan

CAMA Working Papers from Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University

Abstract: The "financial trilemma" asserts that deep financial integration, purely national financial policies and financial stability cannot simultaneously be achieved. Existing formalizations employing ex post burden-sharing games imply the trilemma result hinges on equilibrium selection. We develop a minimal ex ante prudential-effort model where financial integration amplifies cross-border crisis risk and national regulators internalise only part of global losses. The unique symmetric Nash equilibrium underprovides prudential effort and cannot deliver first-best stability when both integration and national policy autonomy are high. That provides a unique-equilibrium foundation for the financial trilemma and clarifies when supranational prudential arrangements are needed.

Keywords: financial trilemma; financial stability; prudential coordination (search for similar items in EconPapers)
JEL-codes: F33 G28 H41 (search for similar items in EconPapers)
Pages: 10 pages
Date: 2026-07
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Persistent link: https://EconPapers.repec.org/RePEc:een:camaaa:2026-51

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