Distortionary effects of anti-crisis measures and how to limit them, DNB Occasional Studies
During the credit crisis, central banks and governments have taken extraordinary measures to preserve financial stability and prevent strong credit rationing of the private sector. Central banks cut official rates, provided liquidity support to the banking sector and supported specific financial markets with asset purchase programmes, whilst governments introduced measures such as guarantee schemes and made capital injections. These interventions prevented the financial system from collapsing and, in that sense, they have been effective. At the same time, the authorities have been aware that their measures may have distortionary effects on the markets. For instance, they may distort the level playing field between financial institutions that received support and those that did not, as is noticeable, for instance, from differences in funding costs. Furthermore, support aimed at specific market segments may lead to shifts in capital flows, and cross-border shifts may take place as a result of country-specific differences in support packages. Longer-term distortionary effects may follow, in particular, from excessive risk taking, e.g. by management, shareholders, bondholders and depositors of financial institutions. Such 'moral hazard' may also be created by extremely low policy rates and IMF measures. In designing their support measures, the authorities have sought to limit possible distortionary effects as much as possible. Thus, to the greatest possible extent, government support was granted on market-compatible and internationally harmonised conditions. Uncertainty among market participants may be mitigated by providing clarity on the details of the support policies, by creating an arm's length relationship between the government and the business management of the support-receiving institutions and by ensuring sustained responsibility on the part of private stakeholders. Of final importance is a smooth exit from support policies as soon as market recovery allows it.
|Date of creation:||Dec 2009|
|Contact details of provider:|| Postal: Postbus 98, 1000 AB Amsterdam|
Web page: http://www.dnb.nl/en/
More information through EDIRC
References listed on IDEAS
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.:
- Bank for International Settlements, 2009.
"An assessment of financial sector rescue programmes,"
Bank for International Settlements, number 48, September.
- Fabio Panetta & Thomas Faeh & Giuseppe Grande & Corrinne Ho & Michael King & Aviram Levy & Federico M. Signoretti & Marco Taboga & Andrea Zaghini, 2009. "An assessment of financial sector rescue programmes," Questioni di Economia e Finanza (Occasional Papers) 47, Bank of Italy, Economic Research and International Relations Area.
- Demirguc-Kunt, Asli & Detragiache, Enrica, 2002. "Does deposit insurance increase banking system stability? An empirical investigation," Journal of Monetary Economics, Elsevier, vol. 49(7), pages 1373-1406, October.
- Demirguc-Kunt, Asli & Detragiache, Enrica, 1999. "Does deposit insurance increase banking system stability ? An empirical investigation," Policy Research Working Paper Series 2247, The World Bank.
- Asli Demirguc-Kunt & Enrica Detragiache, 2000. "Does Deposit Insurance Increase Banking System Stability? An Empirical Investigation," Econometric Society World Congress 2000 Contributed Papers 1751, Econometric Society.
- Asli Demirgüç-Kunt & Enrica Detragiache, 2000. "Does Deposit Insurance Increase Banking System Stability?," IMF Working Papers 00/3, International Monetary Fund.
- Kashyap, Anil K. & Rajan, Raghuram G. & Stein, Jeremy C., 2008. "Rethinking capital regulation," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, pages 431-471. Full references (including those not matched with items on IDEAS)
When requesting a correction, please mention this item's handle: RePEc:dnb:dnbocs:703. 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: (Rob Vet)
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.