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Fiscal Burden Sharing in Cross-Border Banking Crises

Author

Listed:
  • Charles Goodhart

    (Financial Markets Group, London School of Economics)

  • Dirk Schoenmaker

    (Finance Department, VU University Amsterdam)

Abstract

This paper focuses on the recapitalization of failing banks. A recapitalization is efficient if the social benefits (preserving systemic stability) exceed the cost of recapitalization. In a national setting, the implementation of an optimal policy is relatively straightforward. But in a cross-border setting, one is confronted with possible coordination failure. Using a multicountry model, it is shown that ex post negotiations on burden sharing lead to an underprovision of recapitalizations. Next, we explore different ex ante burden sharing mechanisms to overcome the coordination failure. The first is a general scheme financed collectively by the participating countries (generic burden sharing). The second relates the burden to the location of the assets of the bank to be recapitalized (specific burden sharing). The working of the two mechanisms is calibrated with data on large cross border banks in Europe. Because the costs and benefits are better aligned in the specific scheme, it is better able to overcome the coordination failure. JEL Codes: E58, E60, G21, G28.

Suggested Citation

  • Charles Goodhart & Dirk Schoenmaker, 2009. "Fiscal Burden Sharing in Cross-Border Banking Crises," International Journal of Central Banking, International Journal of Central Banking, vol. 5(1), pages 141-165, March.
  • Handle: RePEc:ijc:ijcjou:y:2009:q:1:a:5
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    References listed on IDEAS

    as
    1. Carmen M. Reinhart & Graciela L. Kaminsky, 1999. "The Twin Crises: The Causes of Banking and Balance-of-Payments Problems," American Economic Review, American Economic Association, vol. 89(3), pages 473-500, June.
    2. Dirk Schoenmaker & Sander Oosterloo, 2005. "Financial Supervision in an Integrating Europe: Measuring Cross-Border Externalities," International Finance, Wiley Blackwell, vol. 8(1), pages 1-27, July.
    3. Christiaan van Laecke & Dirk Schoenmaker, 2006. "Current State of Cross-Border Banking," FMG Special Papers sp168, Financial Markets Group.
    4. Xavier Vives, 2001. "Restructuring Financial Regulation in the European Monetary Union," Journal of Financial Services Research, Springer;Western Finance Association, vol. 19(1), pages 57-82, February.
    5. Jean Dermine, 2000. "Bank Mergers in Europe: The Public Policy Issues," Journal of Common Market Studies, Wiley Blackwell, vol. 38(3), pages 409-425, September.
    6. Hoggarth, Glenn & Reis, Ricardo & Saporta, Victoria, 2002. "Costs of banking system instability: Some empirical evidence," Journal of Banking & Finance, Elsevier, vol. 26(5), pages 825-855, May.
    7. Goodhart, Charles & Schoenmaker, Dirk, 1995. "Should the Functions of Monetary Policy and Banking Supervision Be Separated?," Oxford Economic Papers, Oxford University Press, vol. 47(4), pages 539-560, October.
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    More about this item

    JEL classification:

    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • E60 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - General
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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