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Government intervention reduces banking globalisation

In this column, we discuss the last explanation.

Government intervention may affect the depth of banking globalisation. On the asset side of a bank’s balance sheet, a disproportionate decrease in cross-border lending following nationalisation constitutes prima facie proof a negative effect on banking globalisation, known as ‘financial protectionism’ by Rose and Wieladek (2014). Within government support, banks were often asked to improve domestic lending. 2 That’s, the ‘home bias’ exhibited by many (see Cerutti and Claessens 2014, Cerutti et al. 2014, De Haas and Van Horen 2012, Giannetti and Laeven 2012, Presbetero et al. 2014, Forbes et al. 2016) will be exacerbated if the lender received a big public intervention, due to natural preference of a regulator or government towards domestic lending. Furthermore, this effect will be a lot more pronounced in an emergency, especially when there exists a market meltdown as banks face competing demands from regulators and funding constraints (Cerutti and Claessens 2014).

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Government failures in iceland entranced by banking

Historical background

Traditionally, the Icelandic economy was more regulated and politicised than economies generally in most other Western countries. Economic management was more predicated on discretion than rules, with tight connections between private sector firms and political parties. The bank operating system was politicised with usage of capital predicated on nepotism and political connections.

Government control over the economy has reduced as time passes, with key events being the joining of the European Free Trade Association and the European Economic Area in the first 1990s. The latter meant that Iceland got extensive usage of European markets and adopted European regulations.

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A fresh approach to complete the banking union in the eurozone

A fresh approach to complete the banking union in the eurozone

A fresh method of complete the banking union in the Eurozone

Negotiations on the banking union in the Eurozone have already been stuck since the Italian government assembled a blocking minority opposing further discussions on proposals to lessen legacy risks in banks’ balance sheets. This column argues that completing the banking union should once more get priority, and that the European deposit insurance scheme could progress immediately by giving in its early phase that the ESM would provide a liquidity line to national deposit guaranty schemes that had exhausted their funds, without sharing of losses.

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A framework for banking structural reform

A framework for banking structural reform

The 2007-08 crisis revealed regulatory failures that had allowed the shadow bank operating system and systemic risk to grow unchecked. This column evaluates recent proposals to reform the banking industry. Although appropriate pricing of risk should make activity restrictions redundant, there may nevertheless be complementarities between both of these approaches. Ring-fencing could make banking groups easier resolvable and for that reason lower the price of imposing market discipline.