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Multiple safety net regulators and agency problems in the EU: Is Prompt Corrective Action partly the solution?

  • Mayes, David G.
  • Nieto, María J.
  • Wall, Larry

This paper presents a stylized mechanism aimed at dealing with the cross border agency problems that arise in supervising and resolving cross border banking groups in the European Union (EU). The authors assume that PCA policies have been implemented by the national supervisors and explore the institutional changes needed in Europe if PCA is to be effective as an incentive compatible mechanism. The paper identifies these changes starting with enhancements in the availability of information on banking groups to supervisors. Next, the paper considers the collective decision making by 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 analyzes the coordination measures that should be implemented if PCA requires the bank to be resolved.

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Article provided by Elsevier in its journal Journal of Financial Stability.

Volume (Year): 4 (2008)
Issue (Month): 3 (September)
Pages: 232-257

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Handle: RePEc:eee:finsta:v:4:y:2008:i:3:p:232-257
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  1. Rafael Repullo, 2005. "Liquidity, Risk Taking, and the Lender of Last Resort," International Journal of Central Banking, International Journal of Central Banking, vol. 1(2), September.
  2. Alberto Alesina & Guido Tabellini, 2003. "Bureaucrats or Politicians?," Working Papers 238, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
  3. Sironi, Andrea, 2003. " Testing for Market Discipline in the European Banking Industry: Evidence from Subordinated Debt Issues," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 35(3), pages 443-72, June.
  4. 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.
  5. Alberto Alesina & Guido Tabellini, 2005. "Why do Politicians Delegate?," Levine's Bibliography 784828000000000470, UCLA Department of Economics.
  6. Dirk Schoenmaker & Charles Goodhart, 2006. "Burden Sharing in a Banking Crisis in Europe," FMG Special Papers sp164, Financial Markets Group.
  7. David T. Llewellyn & David G. Mayes, 2004. "The role of market discipline in handling problem banks," Finance 0404020, EconWPA.
  8. Larry Wall & Maria Nieto, 2006. "Precondition for a Successful Implementation of Supervisors' Primpt Corrective Action: Is There a Case for a Banking Standard in the EU?," FMG Special Papers sp165, Financial Markets Group.
  9. Douglas D. Evanoff & Larry D. Wall, 2002. "Subordinated debt and prompt corrective regulatory action," FRB Atlanta Working Paper 2002-18, Federal Reserve Bank of Atlanta.
  10. Mayes, David G., 1998. "Improving Banking Supervision," Research Discussion Papers 23/1998, Bank of Finland.
  11. , Richmond Law & Tax (ed.), 2005. "Banking Regulators," OUP Catalogue, Oxford University Press, number 9781904501367, July.
  12. Robert A. Eisenbeis & George G. Kaufman, 2007. "Cross-border banking: challenges for deposit insurance and financial stability in the European Union," FRB Atlanta Working Paper 2006-15, Federal Reserve Bank of Atlanta.
  13. Frederic S. Mishkin, 2005. "How Big a Problem is Too Big to Fail?," NBER Working Papers 11814, National Bureau of Economic Research, Inc.
  14. George J. Benston & George G. Kaufman, 1988. "Risk and solvency regulation of depository institutions: past policies and current options," Staff Memoranda 88-1, Federal Reserve Bank of Chicago.
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