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Fiscal Burden Sharing in Cross-Border Banking Crises

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  • Charles Goodhart

    (Financial Markets Group, London School of Economics)

  • Dirk Schoenmaker

    (Finance Department, VU University Amsterdam)

Abstract

This paper focuses on the recapitalization of failing banks. A recapitalization is efficient if the social benefits (preserving systemic stability) exceed the cost of recapitalization. In a national setting, the implementation of an optimal policy is relatively straightforward. But in a cross-border setting, one is confronted with possible coordination failure. Using a multicountry model, it is shown that ex post negotiations on burden sharing lead to an underprovision of recapitalizations. Next, we explore different ex ante burden sharing mechanisms to overcome the coordination failure. The first is a general scheme financed collectively by the participating countries (generic burden sharing). The second relates the burden to the location of the assets of the bank to be recapitalized (specific burden sharing). The working of the two mechanisms is calibrated with data on large cross border banks in Europe. Because the costs and benefits are better aligned in the specific scheme, it is better able to overcome the coordination failure. JEL Codes: E58, E60, G21, G28.

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Bibliographic Info

Article provided by International Journal of Central Banking in its journal International Journal of Central Banking.

Volume (Year): 5 (2009)
Issue (Month): 1 (March)
Pages: 141-165

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Handle: RePEc:ijc:ijcjou:y:2009:q:1:a:5

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  1. Graciela L. Kaminsky & Carmen M. Reinhart, 1996. "The twin crises: the causes of banking and balance-of-payments problems," International Finance Discussion Papers 544, Board of Governors of the Federal Reserve System (U.S.).
  2. Glenn Hoggarth & Ricardo Reis & Victoria Saporta, 2001. "Costs of banking system instability: some empirical evidence," Bank of England working papers 144, Bank of England.
  3. Christiaan van Laecke & Dirk Schoenmaker, 2006. "Current State of Cross-Border Banking," FMG Special Papers sp168, Financial Markets Group.
  4. Jean Dermine, 2000. "Bank Mergers in Europe: The Public Policy Issues," Journal of Common Market Studies, Wiley Blackwell, vol. 38(3), pages 409-425, 09.
  5. Dirk Schoenmaker & Sander Oosterloo, 2005. "Financial Supervision in an Integrating Europe: Measuring Cross-Border Externalities," International Finance, Wiley Blackwell, vol. 8(1), pages 1-27, 07.
  6. Goodhart, Charles & Schoenmaker, Dirk, 1995. "Should the Functions of Monetary Policy and Banking Supervision Be Separated?," Oxford Economic Papers, Oxford University Press, vol. 47(4), pages 539-60, October.
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