Burden Sharing : From Theory to Practice

The handling of cross-border banks in difficulties gives rise to coordination problems between home and host countries. Goodhart and Schoenmaker (2006, 2009) have suggested to implement an ex ante burden sharing mechanism to overcome the co-ordination failure of national authorities. While burden sharing is technically not very difficult, it requires political cooperation between sovereign nations. The financial crisis has provided some spectacular examples of coordination failure: the failures of Fortis, Lehman and the Icelandic banks illustrate how much damage the absence of an adequate cross-border framework can do to the stability of the global banking system. In the aftermath of the financial crisis, some burden sharing agreements are now being put in place