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Sven Frisch

The financial crisis hit Germany’s banking industry early and severely. But closer analysis reveals that Germany’s banking crisis was peculiarly asymmetric due to the country’s highly segregated three-pillar banking model, and to the differentiated business models, degrees of exposure to international financial markets, and reliance on interbank borrowing, that it entailed. These idiosyncrasies played a major role in shaping the three phases of Germany’s response to that crisis, from the early ad hoc aid measures designed to rescue the banks most heavily exposed to the subprime crisis, through the implementation of a comprehensive scheme to stabilise banks faced with liquidity issues, to the creation of a bad bank to tackle the most severely and persistently affected banks.

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François-Charles Laprévote and Sven Frisch

When the financial crisis struck, the European Union lacked a comprehensive supranational regulatory and bank resolution framework. While EU-based banks operated on a cross-border basis, crisis management and resolution tools remained national in scope. Using the concept of the ‘financial trilemma’, we argue that the Commission’s crisis-time State aid policy sought to fill this void by both leaving Member States enough leeway to restore financial stability and coordinating their interventions to preserve cross-border banking, in line with constitutional market integration objectives. But the limits of State aid law and an often reactive approach to national interventions meant that the scope, overall coherence, and effective contribution of the Commission’s State aid decisions to market integration objectives varied from case to case.