1. Comments on: Financial Stability in a World of Cross-Border Banking: Nordic and Antipodean Solutions to the Problem of Responsibility Without Power By Robert A. Eisenbeis Executive Vice President and Director of Research Federal Reserve Bank of Atlanta Presented at Workshop The Architecture of the Financial System Stability: From Market Micro Structure to Monetary Policy Capri, May 24, 2006

2. Importance-Key Points of the Paper Paper considers the important problem of the adequacy of arrangements to deal with financial problems in large cross-border banking organizations Paper considers the important problem of the adequacy of arrangements to deal with financial problems in large cross-border banking organizations  Cross-border banking can cause problems for regulatory and supervisory authorities which are typically organized on a national basis should a large and important institution get info financial difficulty or fail  Especially critical in Europe where prudential supervision and regulation is responsibility of home country but deposit insurance, lender of last resort and financial stability responsibilities lie with host country Theme of the paper is that current European arrangements are less than optimal, due to both structural and incentive conflicts Theme of the paper is that current European arrangements are less than optimal, due to both structural and incentive conflicts  Resulting agency problems between home and host country regulators make efficient crisis resolution problematic  Not clear that the two alternatives considered in the paper will be much better

3. The Triggering Event Nordia Bank and possibility that it will adopt European Company Statute Nordia Bank and possibility that it will adopt European Company Statute How will Supervision, Deposit Insurance and responsibility for financial stability in the event of a bank failure or systemic problem be apportioned and work? How will Supervision, Deposit Insurance and responsibility for financial stability in the event of a bank failure or systemic problem be apportioned and work? Problems are rooted in financial structure and traditional principle/agent problems Problems are rooted in financial structure and traditional principle/agent problems

4. Specific Problems- Nordia Bank is Systemic  If stopped operating would have damaging and serious spillover effects  But what does stop operating mean? Disappear?Disappear? Fail?Fail? Stop for how long?Stop for how long?  And exactly what are those systemic effects?  Do the remedies engender moral hazard and at what expense?  Unless one spells out exactly what the fears are, one can’t design a regulatory or supervisory remedy to put them aside

5. ISSUES NOT SPECIFICALLY CONSIDERED What Are Systemic Issues and How Do Alternatives Address Them? Lack of access to deposits Lack of access to deposits  Most EU deposit insurance schemes aren’t require to pay out immediately  Typically requirement is 3 mo. Or less  Most critical when institution is not reopened in timely fashion Loss of access to lending facilities Loss of access to lending facilities  When opening is delayed  When there is lack of alternatives Payment system problems may arise due to spillover effects of above problems to other banks and real economy Payment system problems may arise due to spillover effects of above problems to other banks and real economy Is Nordia systemic or does the regulatory structure make it so? Is Nordia systemic or does the regulatory structure make it so?

6. Where Are the Weak Links in Crisis Resolution Process Deposit Insurance Schemes May Be Inadequate Deposit Insurance Schemes May Be Inadequate  Differ in coverage amounts, types of accounts, ownership  Too difficult to sort out in crisis situation  Size of funds are too small Need for temporary liquidity support Need for temporary liquidity support Informational problems Informational problems Decentralized Approach to Failure Resolution Decentralized Approach to Failure Resolution  Regulatory overlap and scope of responsibilities too complex to work out in time Different Interests Between Host and Home Country-Agency problems Different Interests Between Host and Home Country-Agency problems Deposit Insurance Top-Up provisions source of conflict Deposit Insurance Top-Up provisions source of conflict Lack of Well Defined Insolvency Process Lack of Well Defined Insolvency Process  Differing solvency definitions Do Not Address Agency Problems Do Not Address Agency Problems

7. Agency Problems in In Failure Situations Home country may close institution without regard for host country effects Home country may close institution without regard for host country effects Deposit insurer may favor home country depositors to detriment of host country Deposit insurer may favor home country depositors to detriment of host country  Equal v unequal treatment of claims  Domestic depositor preference  Problems of loss allocation Host country may incur losses due to operation of LLR Host country may incur losses due to operation of LLR Will information be shared by home country to allow host country to assess financial condition re LLR? Will information be shared by home country to allow host country to assess financial condition re LLR? Will home country be inclined to forbear? Will home country be inclined to forbear?

8. Weaknesses of Approaches European Approach European Approach  Reliance upon cooperation  Agency problems  Coordination problems  Lack of timely reopening New Zealand Approach New Zealand Approach  Subsidiariztion  Takes away benefits of scale and scope economies and funding synergies  Makes a banking organization operate as mutual fund Shareholders can achieve diversification benefits without resorting to bank holding company formShareholders can achieve diversification benefits without resorting to bank holding company form InefficientInefficient

9. Alternatives Structured Intervention and Early Resolution and Effective PCA to make failure isolated events Structured Intervention and Early Resolution and Effective PCA to make failure isolated events  Prompt Legal Closure before net worth s zero  Prompt estimation and allocation of losses  Prompt reopening of large banks  Prompt re-privatization and recapitalization