Research Discussion Papers, Bank of Finland
No 7/2007:
Multiple safety net regulators and agency problems in the EU: is Prompt Corrective Action a partial solution?
David G Mayes ()
, Maria J Nieto ()
and Larry Wall ()
Abstract: Prompt Corrective Action (PCA) provides a more efficient
mechanism for dealing with problem banks operating in more than one
European country. In a PCA framework, a bank’s losses are likely to be
substantially reduced. This reduction in the losses to deposit insurance
and governments will improve the problem of allocating those losses across
the various insurance schemes and make it less likely that any deposit
insurer will renege on its obligations in a cross-border banking crisis.
This paper explores the institutional changes needed in Europe if PCA is to
be effective in resolving the cross-border agency problems that arise in
supervising and resolving cross-border banking groups. The paper identifies
these changes starting with enhancements in the availability to prudential
supervisors of information on banking groups’ financial condition. Next,
the paper considers collective decision-making by prudential supervisors
with authority to make discretionary decisions within the PCA framework as
soon as a bank of a cross-border banking group falls below the minimum
capital standard. Finally, the paper analyses the coordination measures
that should be implemented if PCA requires the bank to be resolved.
Keywords: banking supervision; European Union; Prompt Corrective Action; (follow links to similar papers)
JEL-Codes: F20; G28; K23; (follow links to similar papers)
44 pages, June 12, 2007
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