The Political Economy of Burden Sharing and Prompt Corrective Action

Gillian G. H. Garcia

Chapter 4 in Financial Institutions and Markets, 2008, pp 97-125 from Palgrave Macmillan

Abstract: Abstract A number of writers have observed that problems exist in the safety net that the European Union (EU) currently has in place to ensure financial stability.1 These deficiencies present a potentially serious international problem as banks increasingly cross state borders—a problem that has become more immediate as a result of the turmoil in the credit markets that started in the summer of 2007. While I am aware that safety-net deficiencies are a worldwide problem, this chapter confines its analysis to arrangements in the United States and the EU. Acceptance of the criticisms of the situation in the EU has provoked a lively discussion of how to improve it. Greater degrees of federalism and uniformity appear to be politically unacceptable in the EU at present (Ingves 2007), and especially after the Irish rejection of the EU Treaty in spring 2008, so proposals for sharing the cost of resolving cross-border failed banks across member countries (burden sharing) and for initiating prompt corrective action (PCA) by supervisors are being offered as alternative remedies. This chapter discusses these two ideas in the light of the U.S. experience.

Keywords: European Union; European Central Bank; Deposit Insurance; Leverage Ratio; Capital Ratio (search for similar items in EconPapers)
Date: 2008
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DOI: 10.1057/9780230617148_4

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