What kind of financial stability for Europe?

Although the debate on financial stability in Europe focuses at what level action should be taken (centralised vs decentralised), the key issue seems what kind of action should be taken to resolve a financial crisis. Two types of arrangements for financial stability (labelled loosely as the market-led and the state-led approach) can be distinguished. Before one argues that ‘some action’ may be needed at centralised level, it should be clear what kind of action should be taken. In addition to discussing the arrangements to solve a crisis (closure, lifeboat, lender of last resort, government bail-out), we will also look at who is the ultimate provider of funds. An issue for further research is to explore burden-sharing arrangements in the case of a rescue of a cross-border bank whose failure would have a systemic impact in more than one country. 1 This short paper is based on comments as a discussant at a conference organised by the Financial Markts Group at the London School of Economics in July 1999 and is published in: C.A.E. Goodhart (ed.), ‘Which Lender of Last Resort for Europe’,Central Banking Publications, London, 2000. The views expressed are those of the author and not necessarily those of the Ministry of Finance in the Netherlands.