Improving the decision-making framework for financial crisis management

Walter Bagehot, English economist and journalist (1826–1877)

The authors would like to thank Sebstatian Schich, Rodrigo Olivares-Caminal, David G Mayes, Charles Enoch for comments and suggestions. All views and indeed errors are the authors’ responsibility.

Introduction

Public confidence plays an important role in sustaining financial system stability. In normal times prudential regulation and supervision of banks, the promotion and use of standards of sound business and financial practice, central bank actions, explicit deposit protection and an effective bank closure mechanism all help to reduce the adverse consequences of a financial crisis emanating from bank failures. It is understood that banks, like other firms, will fail ¹ and the likelihood of this happening is higher when risks in a particular banking concern are not managed appropriately, bubbles in certain markets burst or financial markets are very fragile due to either domestic or foreign reasons.