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Coordinating Bank Failure Costs and Financial Stability

Author

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  • Iman van Lelyveld
  • Marco Spaltro

Abstract

Banking groups have become increasingly multinational but the institutional infrastructure to deal with solvency or liquidity problems is still largely national. This might lead to financial instability if national authorities do not internalise externalities abroad. Recently ex-ante burden sharing agreements have been established (e.g. EFSF), but little empirical work has been done on potential costs and benefits of such agreements. We estimate the costs and benefits of financial stability support for large, internationally active banks under several proposed agreements. We show costs according to the 'national solution', where only home authorities inject capital, as our benchmark. 'Specific' sharing agreements would be redistributive at the expense of smaller and East European countries (not home to large cross-border banking groups). The 'general fund' mechanism will smooth costs across countries but may lead to unequal redistribution of costs. We also show that coordinating bank failure costs may bring about financial stability benefits.

Suggested Citation

  • Iman van Lelyveld & Marco Spaltro, 2011. "Coordinating Bank Failure Costs and Financial Stability," DNB Working Papers 306, Netherlands Central Bank, Research Department.
  • Handle: RePEc:dnb:dnbwpp:306
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    File URL: https://www.dnb.nl/en/binaries/working%20paper%20306_tcm47-256296.pdf
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    References listed on IDEAS

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    1. Friederike Niepmann & Tim Schmidt-Eisenlohr, 2013. "Bank Bailouts, International Linkages, and Cooperation," American Economic Journal: Economic Policy, American Economic Association, pages 270-305.
    2. María Nieto & Garry J. Schinasi, 2007. "EU Framework for Safeguarding Financial Stability; Towards an Analytical Benchmark for Assessing its Effectiveness," IMF Working Papers 07/260, International Monetary Fund.
    3. Krimminger, Michael H., 2008. "The resolution of cross-border banks: Issues for deposit insurers and proposals for cooperation," Journal of Financial Stability, Elsevier, pages 376-390.
    4. Todd Sandler & Keith Sargent, 1995. "Management of Transnational Commons: Coordination, Publicness, and Treaty Formation," Land Economics, University of Wisconsin Press, vol. 71(2), pages 145-162.
    5. Peek, Joe & Rosengren, Eric, 1995. "The Capital Crunch: Neither a Borrower nor a Lender Be," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 27(3), pages 625-638, August.
    6. Kashyap, Anil K. & Rajan, Raghuram G. & Stein, Jeremy C., 2008. "Rethinking capital regulation," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, pages 431-471.
    7. Dirk Schoenmaker & Charles Goodhart, 2006. "Burden Sharing in a Banking Crisis in Europe," FMG Special Papers sp164, Financial Markets Group.
    8. Bruche, Max & González-Aguado, Carlos, 2010. "Recovery rates, default probabilities, and the credit cycle," Journal of Banking & Finance, Elsevier, vol. 34(4), pages 754-764, April.
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    Cited by:

    1. Schoenmaker, Dirk & Siegmann, Arjen, 2014. "Can European bank bailouts work?," Journal of Banking & Finance, Elsevier, vol. 48(C), pages 334-349.

    More about this item

    Keywords

    Burden sharing; crisis resolution; cross-border banks;

    JEL classification:

    • F55 - International Economics - - International Relations, National Security, and International Political Economy - - - International Institutional Arrangements
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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