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Fiscal Burden Sharing in Cross-Border Banking Crises

International Journal of Central Banking, Vol. 5, No. 1, pp. 141-165, 2009

EFA 2008 Athens Meetings Paper

19 Pages Posted: 5 Mar 2008 Last revised: 19 Jan 2010

Charles Goodhart

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

Dirk Schoenmaker

Rotterdam School of Management, Erasmus University; Erasmus Research Institute of Management (ERIM); Centre for Economic Policy Research (CEPR)

Date Written: 2009

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.

Keywords: Banks, Financial Stability, Public Finance, Recapitalisation

JEL Classification: E58, E60, G21, G28

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: https://ssrn.com/abstract=965529

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)

Rotterdam School of Management, Erasmus University ( email )

P.O. Box 1738
Room T08-21
3000 DR Rotterdam
Netherlands

HOME PAGE: http://www.rsm.nl/people/dirk-schoenmaker/

Erasmus Research Institute of Management (ERIM) ( email )

P.O. Box 1738
3000 DR Rotterdam
Netherlands

Centre for Economic Policy Research (CEPR) ( email )

77 Bastwick Street
London, EC1V 3PZ
United Kingdom

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