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Can European bank bailouts work?

Listed author(s):
  • Schoenmaker, Dirk
  • Siegmann, Arjen

Cross-border banking needs cross-border recapitalisation mechanisms. Each mechanism, however, suffers from the financial trilemma, which is that cross-border banking, national financial autonomy and financial stability are incompatible. In this paper, we study the efficiency of different burden-sharing agreements for the recapitalisation of the 30 largest banks in Europe. We consider bank bailouts for these banks in a simulation framework with stochastic country-specific bailout benefits. Among the burden sharing rules, we find that the majority and qualified-majority voting rules come close to the efficiency of a bailout mechanism with a supranational authority. Even a unanimous voting rule works better than home-country bailouts, which are very inefficient. If we assume additional systemic risk benefits, the efficiency of burden sharing rules comes close to the supranational solution.

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Article provided by Elsevier in its journal Journal of Banking & Finance.

Volume (Year): 48 (2014)
Issue (Month): C ()
Pages: 334-349

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Handle: RePEc:eee:jbfina:v:48:y:2014:i:c:p:334-349
DOI: 10.1016/j.jbankfin.2013.03.025
Contact details of provider: Web page: http://www.elsevier.com/locate/jbf

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