Agency theory is used to evaluate how the European Union (EU) may deal with the resolution of goal and agency conflicts in dealing with failing financial institutions. Experience in the United States suggests that the financial and regulatory structure being put in place, which relies upon country-sponsored deposit insurance funds and home country responsibility for supervision and lender-of-last-resort functions, is not likely to be robust to the failure of a large EU institution that threatens the solvency of the deposit insurance fund or that poses systemic risk. The author concludes that the EU needs a centralized and common approach to dealing with troubled institutions.
JEL classification: D72, G28, G38, H30
Key words: agency problems, banking supervision and regulation, EMU, deposit insurance
The author gratefully acknowledges Larry Wall, Scott Frame, Edward J. Kane, and George G. Kaufman for helpful comments and suggestions, particularly as they affect section 4. The views expressed here are the author’s and not necessarily those of the Federal Reserve Bank of Atlanta or the Federal Reserve System. Any remaining errors are the author’s responsibility.
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