Designing Financial Safety Nets to Fit Country Circumstances
The author explains how differences in the informational and contracting environments of countries affect the optimal design of their financial safety nets and their optimal strategies for managing financial crises. He explains how to design and op...
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| Format: | Policy Research Working Paper |
| Language: | English en_US |
| Published: |
World Bank, Washington, DC
2014
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| Subjects: | |
| Online Access: | http://documents.worldbank.org/curated/en/2000/09/693068/designing-financial-safety-nets-fit-country-circumstances http://hdl.handle.net/10986/19792 |
| Summary: | The author explains how differences in
the informational and contracting environments of countries
affect the optimal design of their financial safety nets and
their optimal strategies for managing financial crises. He
explains how to design and operate safety nets at minimum
cost to taxpayers and well-managed banks in countries whose
informational and contracting technologies differ. His basic
premise is that optimal regulation is not a
one-size-fits-all proposition. A country's safety net
should be transparent, deterrent to too much risk-taking,
and accountable, but the author shows large differences
across countries in the transparency and deterrence banks
afford their depositors, highlighting why the design of
safety nets must allow for differences in the enforceability
of private contracts. The weaker a country's
informational, ethical, and corporate governance
environment, the more a wholly governmental system of
explicit deposit guarantees is apt to undermine bank safety
and stability. How a country's safety net evolves
depends on the ability of the private and public sectors to
value banks, discipline risk-taking, and resolve financial
difficulties promptly. And political accountability is
essential if the public part of these tasks is to evolve
effectively and efficiently. As a rule of thumb, safety-net
managers should avoid either subsidizing or taxing bank
risk-taking, says the author. Even if analysts could
formulate a beneficial tax or subsidy rule, it is unlikely
that channeling the effect through a government-run deposit
insurance system that fails to account publicly for the size
of taxpayers' stake could improve upon more
straightforward arrangements. |
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