Fiscal Burden Sharing in Cross Border Banking Crises

Project type: CERGE/GDN RRC XI, 2011

Project team:

• Alina Nicoleta Radu - coordinator
• Ciprian Necula

Abstract

An important aspect in managing and addressing a cross-border financial crisis is the tax burden sharing between affected countries. Fiscal costs incurred by the rescue of a banking group may be substantial and the sharing process can generate difficult negotiations of the countries involved, leading to delays in the development of crisis management and resolution. The paper proposes to explore ex-ante mechanisms for fiscal burden sharing to overcome the coordination failure in Eastern European Countries, where foreign banks control more than 65 percent of total banking assets. We will explore several alternative methods for the distribution of fiscal burden and assess the fiscal implications of these methods of distribution. Because the mechanisms of fiscal burden sharing imply potential adverse selection and moral hazard problems, it is possible that the appropriate burden sharing mechanism for the Eastern European Countries to be a mix of ex-ante mechanisms, the composition of the mix depending on the proportion of foreign assets in total banking assets and the systemic importance of the failing bank. More specific, we will focus on the policy implications for the case when a bank is systemic in the host country, but not in the home country.

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