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Preserving Financial Stability: A Dilemma for the European Union

"Financial institutions are now crossing national borders within the EU. In balancing member states' desires for sovereignty against the effectiveness of the financial safety net, banks are currently all chartered by Member States and the safety net remains largely the responsibility of individual national governments. The paper questions whether minimally harmonized national safety nets and reliance on voluntary cooperation can keep EU banks safe and sound and prevent financial contagion. The paper examines a number of proposed remedies and recommends enhancing market discipline and adopting a system of prompt corrective action and least-cost resolution to minimize the incidence of bailouts". ("JEL "F36, G18, G21) Copyright 2007 Western Economic Association International.