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Multiple safety net regulators and agency problems in the EU: is Prompt Corrective Action a partial solution?

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Author Info

  • Mayes, David G

    ()
    (University of Auckland and Bank of Finland)

  • Nieto, Maria J

    ()
    (Banco de España)

  • Wall , Larry

    ()
    (Federal Reserve Bank of Atlanta)

Abstract

Prompt Corrective Action (PCA) provides a more efficient mechanism for dealing with problem banks operating in more than one European country. In a PCA framework, a bank’s losses are likely to be substantially reduced. This reduction in the losses to deposit insurance and governments will improve the problem of allocating those losses across the various insurance schemes and make it less likely that any deposit insurer will renege on its obligations in a cross-border banking crisis. This paper explores the institutional changes needed in Europe if PCA is to be effective in resolving the cross-border agency problems that arise in supervising and resolving cross-border banking groups. The paper identifies these changes starting with enhancements in the availability to prudential supervisors of information on banking groups’ financial condition. Next, the paper considers collective decision-making by prudential supervisors with authority to make discretionary decisions within the PCA framework as soon as a bank of a cross-border banking group falls below the minimum capital standard. Finally, the paper analyses the coordination measures that should be implemented if PCA requires the bank to be resolved.

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File URL: http://www.suomenpankki.fi/en/julkaisut/tutkimukset/keskustelualoitteet/Documents/0707netti.pdf
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Bibliographic Info

Paper provided by Bank of Finland in its series Research Discussion Papers with number 7/2007.

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Length: 44 pages
Date of creation: 12 Jun 2007
Date of revision:
Handle: RePEc:hhs:bofrdp:2007_007

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Postal: Bank of Finland, P.O. Box 160, FI-00101 Helsinki, Finland
Web page: http://www.suomenpankki.fi/en/
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Keywords: banking supervision; European Union; Prompt Corrective Action;

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References

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  1. Llewellyn, David T. & Mayes , David G., 2003. "The role of market discipline in handling problem banks," Research Discussion Papers 21/2003, Bank of Finland.
  2. Alesina, Alberto F & Tabellini, Guido, 2004. "Bureaucrats or Politicians?," CEPR Discussion Papers 4252, C.E.P.R. Discussion Papers.
  3. Alberto Alesina & Guido Tabellini, 2005. "Why do Politicians Delegate?," Harvard Institute of Economic Research Working Papers 2079, Harvard - Institute of Economic Research.
  4. Andrea Sironi, 2001. "Testing for market discipline in the European banking industry: evidence from subordinated debt issues," Proceedings 712, Federal Reserve Bank of Chicago.
  5. Kahn, Charles M. & Santos, Joao A.C., 2005. "Allocating bank regulatory powers: Lender of last resort, deposit insurance and supervision," European Economic Review, Elsevier, vol. 49(8), pages 2107-2136, November.
  6. Douglas D. Evanoff & Larry D. Wall, 2002. "Subordinated debt and prompt corrective regulatory action," Working Paper 2002-18, Federal Reserve Bank of Atlanta.
  7. Frederic S. Mishkin, 2005. "How Big a Problem is Too Big to Fail?," NBER Working Papers 11814, National Bureau of Economic Research, Inc.
  8. Robert A. Eisenbeis & George G. Kaufman, 2007. "Cross-border banking: challenges for deposit insurance and financial stability in the European Union," Working Paper 2006-15, Federal Reserve Bank of Atlanta.
  9. Gilbert,Christopher L. & Vines,David (ed.), 2006. "The World Bank," Cambridge Books, Cambridge University Press, number 9780521029018, April.
  10. , Richmond Law & Tax (ed.), 2005. "Banking Regulators," OUP Catalogue, Oxford University Press, number 9781904501367, Octomber.
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Cited by:
  1. Martin Cihák & Jörg Decressin, 2007. "The Case for a European Banking Charter," IMF Working Papers 07/173, International Monetary Fund.

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