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Managing Financial RisksFrom Global to Local$
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Gordon L. Clark, Adam D. Dixon, and Ashby H. B. Monk

Print publication date: 2009

Print ISBN-13: 9780199557431

Published to Oxford Scholarship Online: September 2009

DOI: 10.1093/acprof:oso/9780199557431.001.0001

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The Changing Political Geography of Financial Crisis Management

The Changing Political Geography of Financial Crisis Management

(p.27) 1 The Changing Political Geography of Financial Crisis Management
Managing Financial Risks

Louis W. Pauly

Oxford University Press

In the wake of several financial crises that also now spanned national boundaries, pragmatic financial supervisors gradually built a workable regime around the principle of ‘home-country control’ — the government ultimately responsible for any particular coordinated response necessary to stabilize an interdependent system was the government of the state within which a troubled institution was licensed and clearly based. A truly integrated pan-European market, however, just as a truly global market, pushes such a regime past its limit. In fact, it is already the case that the emergence of certain large, complex financial institutions in Europe blurs the identity of the responsible government and opens the policy space for new supervisory approaches and common agreement on burden sharing. In principle and in extremis, that space can only be filled with an understanding involving the fundamental commitment of fiscal resources, and by the sharing of such a commitment by national authorities. For various reasons, the extent of that commitment may have to remain implicit, but it will only be plausible if credible structures are in place to coordinate responses in the event of emergency. The difficulty in putting these crisis prevention and crisis management arrangements in place exposes the political dilemma at the heart of the financial integration project, both in Europe and more broadly. Finance respects fewer frontiers, but fiscal politics remains geographically bounded. This chapter sets out the conceptual and historical context for understanding that dilemma, and in this light examines the contemporary evolution of policy responses.

Keywords:   global finance, risk management, Europe, integration, financial crisis, home-country control

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