Thus, a central bank providing emergency liquidity assistance must base its decision on the possibility of a loss. Given the uncertainty about the ultimate cost of emergency liquidity assistance and the central banks’ national mandates, conflicts of interest are likely to emerge in a decision to grant emergency liquidity assistance to a bank with major cross-border activities. It is not difficult to see how these conflicts could complicate crisis management, in particular if the bank is systemically important in any of the host countries. In the present situation, the home country’s authorities are likely to have the principal responsibility, at least if it is organised according to a branch structure. If the bank is systemic in the home country, the decision to provide emergency liquidity assistance may not be so difficult; the risk of incurring a loss may be worth it to avoid a systemic crisis in the home country. But if the bank is not systemic in the home country, but systemic in the host country, there may be some hesitation on behalf of the home country’s authorities to provide liquidity assistance. If the bank has a branch structure, the demise of the bank means that the foreign branch goes down with it, and, because it’s systemic in the host country, financial stability may be at risk and greater social costs are incurred at the host than in the home country.
A basic challenge for the authorities dealing with cross-border banks is how to find an acceptable formula for sharing the burden and the costs of a crisis. Goodhart and Schoenmaker have in their paper suggested a number of keys that could be explored to create such a formula, for example the relative size of GDP, the ECB capital ratio, and the relative amount of bank assets in the country. As pointed out by Goodhart and Schoenmaker, the first question to be asked is whether one would want a general solution where all countries contribute according to some fixed key, or more specific burden sharing arrangements, where only the directly involved countries participate according to a more flexible key, presumably taking into account the geographic spread of the bank’s business. To achieve the latter, it would be necessary to find some commonly agreed criteria for assessing a bank’s systemic relevance to the financial system of a country. Merely using market shares as a criterion will probably not be adequate as other aspects, such as the bank’s relevance to the payment system, clearing and settlement, involvement in inter-bank securities markets and so on would also be important in this respect. At the same time, in a constantly changing banking landscape, it would be difficult to find criteria that are so clear-cut that assessments will not be “up for negotiation” in a sharp crisis scenario.