A simple prudential-effort foundation for the financial trilemma

The “financial trilemma” asserts that deep financial integration, purely national financial policies and financial stability cannot simultaneously be achieved. Existing formalisations 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.