Financial Safety Nets: Lessons from Chile
Should governments ever override bank regulators who are attempting to close down insolvent financial institutions? An analysis of Chile's history shows that time after time from the 1850s to the 1980s, prudential banking regulations were abandoned during economic crises when attempts to impose tight solvency standards proved impossible to enforce. Chile's current stringent banking regulations may prove more durable, but mounting financial distress is equally likely to lead the government to adopt policies that prevent bank failure but undermine the authority of regulators. Bank regulators, including the central bank, are responsible for creating a financial safety net to protect depositors against loss and for enforcing the rules of prudent behavior that are required for a stable financial system. Because safety nets often additionally cover losses to bank owners and borrowers, the support they offer encourages risk-taking by the private sector--an action that may promote financial deepening, but at a high budgetary cost to the government. Poorly designed safety nets may have to be suspended during crises to prevent losses from mounting and to limit the government's liability. Copyright 2000 by Oxford University Press.
Volume (Year): 15 (2000)
Issue (Month): 1 (February)
|Contact details of provider:|| Postal: Oxford University Press, Great Clarendon Street, Oxford OX2 6DP, UK|
Phone: (202) 477-1234
Fax: 01865 267 985
Web page: http://wbro.oxfordjournals.org/
More information through EDIRC
|Order Information:||Web: http://www.oup.co.uk/journals|
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
When requesting a correction, please mention this item's handle: RePEc:oup:wbrobs:v:15:y:2000:i:1:p:69-84. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Oxford University Press)or (Christopher F. Baum)
If references are entirely missing, you can add them using this form.