Inadequacy of Nation-Based and Var-Based Safety Nets in the European Union
Edward J. Kane
Boston College - Department of Finance; National Bureau of Economic Research (NBER)
NBER Working Paper No. w12170
Considered as a social contract, a financial safety net imposes duties and confers rights on different sectors of the economy. Within a nation, elements of incompleteness inherent in this contract generate principal-agent conflicts that are mitigated by formal agreements, norms, laws, and the principle of democratic accountability. Across nations, additional gaps emerge that are hard to bridge. This paper shows that nationalistic biases and leeway in principles used to measure value-at-risk and bank capital make it unlikely that the crisis-prevention and crisis-resolution schemes incorporated in Basel II and EU Directives could allocate losses imbedded in troubled institutions efficiently or fairly across member nations.
Number of Pages in PDF File: 23working papers series
Date posted: July 17, 2006
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