Coordinating Bank Failure Costs and Financial Stability
AbstractBanking groups have become increasingly multinational but the institutional infrastructure to deal with solvency or liquidity problems is still largely national. This might lead to financial instability if national authorities do not internalise externalities abroad. Recently ex-ante burden sharing agreements have been established (e.g. EFSF), but little empirical work has been done on potential costs and benefits of such agreements. We estimate the costs and benefits of financial stability support for large, internationally active banks under several proposed agreements. We show costs according to the ‘national solution’, where only home authorities inject capital, as our benchmark. ‘Specific’ sharing agreements would be redistributive at the expense of smaller and East European countries (not home to large cross-border banking groups). The ‘general fund’ mechanism will smooth costs across countries but may lead to unequal redistribution of costs. We also show that coordinating bank failure costs may bring about financial stability benefits.
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Bibliographic InfoPaper provided by Netherlands Central Bank, Research Department in its series DNB Working Papers with number 306.
Date of creation: Aug 2011
Date of revision:
Burden sharing; crisis resolution; cross-border banks;
Find related papers by JEL classification:
- F55 - International Economics - - International Relations and International Political Economy - - - International Institutional Arrangements
- G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
- G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
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