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Inadequacy of Nation-Based and VaR-Based Safety Nets in the European Union

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  • Edward J. Kane

Abstract

Considered as a social contract, a financial safety net imposes duties and confers rights on different sectors of the economy. Within a nation, elements of incompleteness inherent in this contract generate principal-agent conflicts that are mitigated by formal agreements, norms, laws, and the principle of democratic accountability. Across nations, additional gaps emerge that are hard to bridge. This paper shows that nationalistic biases and leeway in principles used to measure value-at-risk and bank capital make it unlikely that the crisis-prevention and crisis-resolution schemes incorporated in Basel II and EU Directives could allocate losses imbedded in troubled institutions efficiently or fairly across member nations.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 12170.

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Date of creation: Apr 2006
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Publication status: published as Kane, Edward. "Inadequacy of nation-based and VaR-based safety nets in the European Union." The North American Journal of Economics and Finance 17, 3 (December 2006): 375-387.
Handle: RePEc:nbr:nberwo:12170

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  1. Xavier Vives, 2001. "Restructuring Financial Regulation in the European Monetary Union," Journal of Financial Services Research, Springer, vol. 19(1), pages 57-82, February.
  2. Edward J. Kane, 2005. "Can the European Community Afford to Neglect the Need for More Accountable Safety-Net Management?," NBER Working Papers 11860, National Bureau of Economic Research, Inc.
  3. Schüler, Martin, 2003. "How Do Banking Supervisors Deal with Europe-wide Systemic Risk?," ZEW Discussion Papers 03-03, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
  4. Smith, Adam, 1759. "The Theory of Moral Sentiments," History of Economic Thought Books, McMaster University Archive for the History of Economic Thought, McMaster University Archive for the History of Economic Thought, number smith1759.
  5. Huizinga, Harry, 2005. "The EU Deposit Insurance Directive: Does One Size Fit All?," CEPR Discussion Papers 5277, C.E.P.R. Discussion Papers.
  6. Dangl, Thomas & Lehar, Alfred, 2004. "Value-at-risk vs. building block regulation in banking," Journal of Financial Intermediation, Elsevier, Elsevier, vol. 13(2), pages 96-131, April.
  7. Sander Osterloo & Dirk Schoenmaker, 2004. "Financial Supervision in an Integrating Europe: Measuring Cross-Border Externalities," FMG Special Papers, Financial Markets Group sp156, Financial Markets Group.
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Cited by:
  1. Alexander, Gordon J. & Baptista, Alexandre M. & Yan, Shu, 2014. "Bank regulation and international financial stability: A case against the 2006 Basel framework for controlling tail risk in trading books," Journal of International Money and Finance, Elsevier, Elsevier, vol. 43(C), pages 107-130.
  2. Alexander, Gordon J. & Baptista, Alexandre M. & Yan, Shu, 2012. "When more is less: Using multiple constraints to reduce tail risk," Journal of Banking & Finance, Elsevier, vol. 36(10), pages 2693-2716.
  3. Alexander, Gordon J. & Baptista, Alexandre M. & Yan, Shu, 2012. "Bank regulation and stability: An examination of the Basel market risk framework," Discussion Papers 09/2012, Deutsche Bundesbank, Research Centre.

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