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Financial Stability and Policy Cooperation

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  • Vítor Gaspar
  • Garry Schinasi

Abstract

Within the context of the Global Crisis, this paper examines the ongoing policy challenges in establishing a European framework for financial regulation and supervision. We do so taking into account the evidence provided during the crisis of pervasive spillover effects and cross-country interdependence. The paper applies game-theoretic models as tools to think about the cross-country aspects of European financial integration over time. Specifically, the paper applies the economic theory of alliances of Olson and Zechauser (1966) and the private provision of public goods of Bergstrom, Blume and Varian (1986). We contrast the non-cooperative Nash equilibrium allocation with cooperative (Coase) outcomes. The latter can be expected to obtain under zero transaction costs. We follow Coase in taking zero transaction costs as a benchmark to examine the factors that may favor (or hinder) cooperation in specific circumstances. We consider the importance of iterated interactions through the theory of repeated games, case studies, and experimental evidence to identify factors favoring or hindering successful cooperation. The total number of participants, time, foresight, multiple equilibria, leadership, the magnitude and volatility of gains and losses, imperfect and asymmetric information, decision and bargaining costs, monitoring, and enforcement are all important factors. In the paper we stress the importance of an institutional approach that minimizes obstacles to reaching cooperative outcomes. We highlight the need for effective procedures to deal with systemic risk, an agreed set of rules underpinning the single European financial market (e.g. state aid rules and a single rule book), and effective restructuring, resolution and crisis management mechanisms.

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Bibliographic Info

Paper provided by Banco de Portugal, Economics and Research Department in its series Working Papers with number o201001.

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Date of creation: 2010
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Handle: RePEc:ptu:wpaper:o201001

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  1. Prati, A. & Schinasi, G.J., 1999. "Financial Stability in European Economic and Monetary Union," Princeton Studies in International Economics 86, International Economics Section, Departement of Economics Princeton University,.
  2. Coase, Ronald H., 1991. "The Institutional Structure of Production," Nobel Prize in Economics documents 1991-1, Nobel Prize Committee.
  3. Sandler,Todd & Hartley,Keith, 1995. "The Economics of Defense," Cambridge Books, Cambridge University Press, number 9780521447287, April.
  4. Unknown, 2009. "More Than One Step to Financial Stability," Policy Briefs 341, Bruegel.
  5. Fabian Valencia & Luc Laeven, 2008. "Systemic Banking Crises," IMF Working Papers 08/224, International Monetary Fund.
  6. Cornes,Richard & Sandler,Todd, 1996. "The Theory of Externalities, Public Goods, and Club Goods," Cambridge Books, Cambridge University Press, number 9780521477185, April.
  7. María J. Nieto & Garry J. Schinasi, 2008. "EU framework for safeguarding financial stability: Towards an analytical benchmark for assessing its effectiveness," Banco de Espa�a Occasional Papers 0801, Banco de Espa�a.
  8. Keith Hartley & Todd Sandler, 2001. "Economics of Alliances: The Lessons for Collective Action," Journal of Economic Literature, American Economic Association, vol. 39(3), pages 869-896, September.
  9. Sander Osterloo & Dirk Schoenmaker, 2004. "Financial Supervision in an Integrating Europe: Measuring Cross-Border Externalities," FMG Special Papers sp156, Financial Markets Group.
  10. 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.
  11. Pedro Gustavo Teixeira & Garry J. Schinasi, 2006. "The Lender of Last Resort in the European Single Financial Market," IMF Working Papers 06/127, International Monetary Fund.
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Cited by:
  1. Alexis Derviz & Jakub Seidler, 2012. "Coordination Incentives in Cross-Border Macroprudential Regulation," Working Papers 2012/08, Czech National Bank, Research Department.

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