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http://ssrn.com/abstract=965529
 
 

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Fiscal Burden Sharing in Cross-Border Banking Crises


Charles Goodhart


London School of Economics & Political Science (LSE) - Financial Markets Group

Dirk Schoenmaker


Duisenberg School of Finance; VU University Amsterdam

2009

International Journal of Central Banking, Vol. 5, No. 1, pp. 141-165, 2009
EFA 2008 Athens Meetings Paper

Abstract:     
This paper focuses on the recapitalisation of failing banks. A recapitalisation is efficient if the social benefits (preserving systemic stability) exceed the cost of recapitalisation. In a national setting, the implementation of an optimal policy is relatively straightforward. But in a cross-border setting, one is confronted with possible co-ordination failure. Using a multi-country model, it is shown that ex post negotiations on burden sharing lead to an underprovision of recapitalisations. Next, we explore different ex ante burden sharing mechanisms. 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 recapitalised (specific burden sharing). The working of the two mechanisms is calibrated with data on large cross-border banks in Europe. As the costs and benefits are better aligned in the specific scheme, the latter is better able to overcome the co-ordination failure.

Number of Pages in PDF File: 19

Keywords: Banks, Financial Stability, Public Finance, Recapitalisation

JEL Classification: E58, E60, G21, G28

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Date posted: March 5, 2008 ; Last revised: January 19, 2010

Suggested Citation

Goodhart, Charles and Schoenmaker, Dirk, Fiscal Burden Sharing in Cross-Border Banking Crises (2009). International Journal of Central Banking, Vol. 5, No. 1, pp. 141-165, 2009; EFA 2008 Athens Meetings Paper. Available at SSRN: http://ssrn.com/abstract=965529

Contact Information

Charles A.E. Goodhart
London School of Economics & Political Science (LSE) - Financial Markets Group ( email )
Houghton Street
London WC2A 2AE
United Kingdom
0207 955 7555 (Phone)
0207 242 1006 (Fax)
Dirk Schoenmaker (Contact Author)
Duisenberg School of Finance ( email )
Gustav Mahlerplein 117
Amsterdam, 1082 MS
Netherlands
+31205258580 (Phone)
HOME PAGE: http://www.dsf.nl
VU University Amsterdam ( email )
De Boelelaan 1105
Amsterdam, 1081 HV
Netherlands
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