Seems like banking stability is the theme this Saturday!. Here's another research report on this issue written by Robert A. Eisenbeis
and George G. Kaufman, two luminaries of the banking world. Eisenbeis was Executive Vice President and Director of Research at the Federal Reserve Bank of Atlanta and Kaufman is the John Smith Professor of Banking at Loyola University Chicago and a consultant to the Federal Reserve Bank of Chicago.
If you see their paper, their constant emphasis on the word "prompt" is so vital. Customer and consumer confidence is fickle, and can ebb/flow very very quickly. So there is simply no time for navel gazing or finger pointing. If you need to do something, do it very quickly and fast. That means that decision making has to be quick. Which in turn means that roles/responsibilities are clear. My personal problem is that the last is very unclear in the European Financial Landscape.
And my biggest worry is that this will show up when a big bank goes under. Look at the performance of the various European regulators and ECB during the recent credit crunch. A variety of European and American banks based in the UK suffered liquidity problems, credit issues and reputational problems, and you had a variety of responses, mostly uncoordinated. This is a word of warning to our political leaders and economic leaders to get their act together.
If you want to write a case study, see how the various leaders in Europe reacted to the situation when BNP Paribas reported issues with its funds. Headless chickens! But this paper is a great start to that analysis, it gives very detailed tables relating to who or what is responsible for a failed institution. Deposit insurance across Europe. Funding mechanisms of this deposit insurance. Cross border banking demographics. And And. If somebody wants a copy, more than happy to share this. I quote their last but one closing paragraph.
The focus of this study has been on potential problems in the structure of supervisory and deposit insurance systems in cross-border banking and the related aspects of failure resolution and coordination when financial problems arise, with particular emphasis on the EU. The issue is of substantial current importance and deserves attention because the costs of any resulting crisis may more than offset the well analyzed efficiency benefits of cross-border banking. We have identified a number of issues and concerns about the present system design that are likely to result in higher than necessary costs of insolvencies in cross-border banking in the EU. To date, little progress appears to have been made in the EU in dealing with them. Indeed, as cross border branches and subsidiaries increase in importance in host EU countries, the resulting potential dangers of the current structure.are likely to become large and may not only reduce aggregate welfare in the affected countries substantially when foreign banks with domestic branches or subsidiaries approach insolvency, but also threaten financial stability.
Eisenbeis, R.A., Kaufman, G.G., Cross border banking and financial stability in the EU, Journal of Financial Stability (2007), doi:10.1016/j.jfs.2007.09.004
Abstract:
This paper examines the implications that alternative regulatory structures may have for resolving failed banking institutions. Emphasis on the European Union (EU), which is both economically and financially large and has several features relating to cross-border banking in the form of direct investment that may heighten the problems we consider. To ensure the efficient resolution of bank failures with minimum, if any, credit and liquidity losses four
policies should be followed. These include prompt legal closure of institutions before they become economically insolvent, prompt identification of claims and assignment of losses, prompt reopening of failed institutions, and prompt re-capitalizing and re-privatization of failed institutions. These policies together with a prompt corrective action system and structured early
intervention and resolution regime could be voluntarily adopted through the use of deposit insurance premium discounts as an incentive.
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