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Inadequacy of Nation-Based and VaR-Based Safety Nets in the European Union

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  • Edward J. Kane

Abstract

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.

Suggested Citation

  • Edward J. Kane, 2006. "Inadequacy of Nation-Based and VaR-Based Safety Nets in the European Union," NBER Working Papers 12170, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:12170
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    References listed on IDEAS

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    1. Xavier Vives, 2001. "Restructuring Financial Regulation in the European Monetary Union," Journal of Financial Services Research, Springer;Western Finance Association, vol. 19(1), pages 57-82, February.
    2. Dangl, Thomas & Lehar, Alfred, 2004. "Value-at-risk vs. building block regulation in banking," Journal of Financial Intermediation, Elsevier, vol. 13(2), pages 96-131, April.
    3. Huizinga, Harry, 2005. "The EU Deposit Insurance Directive: Does One Size Fit All?," CEPR Discussion Papers 5277, C.E.P.R. Discussion Papers.
    4. 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.
    5. Edward Kane, 2006. "Can the European Community Afford to Neglect the Need for More Accountable Safety-Net Management?," Atlantic Economic Journal, Springer;International Atlantic Economic Society, vol. 34(2), pages 127-144, June.
    6. Paul H. Kupiec & James M. O'Brien, 1998. "Deposit insurance, bank incentives, and the design of regulatory policy," Economic Policy Review, Federal Reserve Bank of New York, vol. 4(Oct), pages 201-211.
    7. Smith, Adam, 1759. "The Theory of Moral Sentiments," History of Economic Thought Books, McMaster University Archive for the History of Economic Thought, number smith1759.
    8. Schüler, Martin, 2003. "How Do Banking Supervisors Deal with Europe-wide Systemic Risk?," ZEW Discussion Papers 03-03, ZEW - Leibniz Centre for European Economic Research.
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    Cited by:

    1. Hammoudeh, Shawkat & Chen, Li-Hsueh & Yuan, Yuan, 2011. "Asymmetric convergence and risk shift in the TED spreads," The North American Journal of Economics and Finance, Elsevier, vol. 22(3), pages 277-297.
    2. Alexander, Gordon J. & Baptista, Alexandre M. & Yan, Shu, 2013. "A comparison of the original and revised Basel market risk frameworks for regulating bank capital," Journal of Economic Behavior & Organization, Elsevier, vol. 85(C), pages 249-268.
    3. Alexander, Gordon J. & Baptista, Alexandre M. & Yan, Shu, 2012. "When more is less: Using multiple constraints to reduce tail risk," Journal of Banking & Finance, Elsevier, vol. 36(10), pages 2693-2716.
    4. Alexander, Gordon J. & Baptista, Alexandre M. & Yan, Shu, 2014. "Bank regulation and international financial stability: A case against the 2006 Basel framework for controlling tail risk in trading books," Journal of International Money and Finance, Elsevier, vol. 43(C), pages 107-130.
    5. Hammoudeh, Shawkat & Sari, Ramazan, 2011. "Financial CDS, stock market and interest rates: Which drives which?," The North American Journal of Economics and Finance, Elsevier, vol. 22(3), pages 257-276.
    6. Alexander, Gordon J. & Baptista, Alexandre M. & Yan, Shu, 2021. "Regulation of bank proprietary trading post 2007–09 crisis: An examination of the Basel framework and Volcker rule," Journal of International Money and Finance, Elsevier, vol. 119(C).
    7. Alexander, Gordon J. & Baptista, Alexandre M. & Yan, Shu, 2012. "Bank regulation and stability: An examination of the Basel market risk framework," Discussion Papers 09/2012, Deutsche Bundesbank.
    8. Gyöngyi Bugár & Anita Ratting, 2016. "Revision of the quantification of market risk in the Basel III regulatory framework," Financial and Economic Review, Magyar Nemzeti Bank (Central Bank of Hungary), vol. 15(1), pages 33-50.

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    More about this item

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • P51 - Political Economy and Comparative Economic Systems - - Comparative Economic Systems - - - Comparative Analysis of Economic Systems

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