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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.

Suggested Citation

  • Vítor Gaspar & Garry Schinasi, 2010. "Financial Stability and Policy Cooperation," Working Papers o201001, Banco de Portugal, Economics and Research Department.
  • Handle: RePEc:ptu:wpaper:o201001
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    File URL: https://www.bportugal.pt/sites/default/files/anexos/papers/op201001_0.pdf
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    References listed on IDEAS

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    4. Garry J. Schinasi & Pedro Gustavo Teixeira, 2006. "The Lender of Last Resort in the European Single Financial Market," World Scientific Book Chapters, in: Gerard Caprio Jr & Douglas D Evanoff & George G Kaufman (ed.), Cross-Border Banking Regulatory Challenges, chapter 23, pages 349-372, World Scientific Publishing Co. Pte. Ltd..
    5. Jappelli, Tullio & Pagano, Marco, 2008. "Financial Market Integration Under EMU," CEPR Discussion Papers 7091, C.E.P.R. Discussion Papers.
    6. 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, March.
    7. Nicolas Véron, 2007. "Is Europe ready for a major banking crisis?," Policy Briefs 234, Bruegel.
    8. Garry Schinasi, 2009. "More Than One Step to Financial Stability," Policy Briefs 341, Bruegel.
    9. Mr. Luc Laeven & Mr. Fabian Valencia, 2008. "Systemic Banking Crises: A New Database," IMF Working Papers 2008/224, International Monetary Fund.
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    Cited by:

    1. Alexis Derviz & Jakub Seidler, 2012. "Coordination Incentives in Cross-Border Macroprudential Regulation," Working Papers IES 2012/21, Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies, revised Jul 2012.
    2. Miroslav Nedelchev, 2018. "Cooperation Among Eu Banking Supervisory Authorities: A Game Model," Economics and Management, Faculty of Economics, SOUTH-WEST UNIVERSITY "NEOFIT RILSKI", BLAGOEVGRAD, vol. 14(2), pages 11-19.

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