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Financial safety nets: reconstructing and modelling a policymaking metaphor

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Abstract

This paper explains that financial safety nets exist because of difficulties in enforcing contracts and shows that elements of deposit-insurance schemes differ substantially across countries. It shows that differences in the design of financial safety nets correlate significantly with differences in the informational and contracting environments of individual countries and that a country's GDP per capita is correlated with proxies for a country's level of: (1) informational transparency, (2) contract enforcement and deterrent rights, and (3) accountability for safety net officials. The analysis portrays deposit insurance as a part of a country's larger safety net and contracting environment. This means that there is no universal method for preventing and resolving banking problems and that the structure of a country's safety net should evolve over time with changes in private and government regulators' capacity for valuing financial institutions, disciplining risk taking and resolving insolvency promptly, and for being held accountable for how well they perform these tasks.

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  • Edward Kane, 2001. "Financial safety nets: reconstructing and modelling a policymaking metaphor," The Journal of International Trade & Economic Development, Taylor & Francis Journals, vol. 10(3), pages 237-273.
    • Handle: RePEc:taf:jitecd:v:10:y:2001:i:3:p:237-273
    DOI: 10.1080/09638190110061302
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    Cited by:

    1. Kane, Edward J., 2003. "What kind of multinational deposit-insurance arrangements might best enhance world welfare?," Pacific-Basin Finance Journal, Elsevier, vol. 11(4), pages 413-428, September.
    2. Edward Kane, 2010. "The Importance of Monitoring and Mitigating the Safety-Net Consequences of Regulation-Induced Innovation," Review of Social Economy, Taylor & Francis Journals, vol. 68(2), pages 145-161.
    3. William R. White, 2004. "Are changes in financial structure extending safety nets?," BIS Working Papers 145, Bank for International Settlements.

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    More about this item

    Keywords

    Safety Nets; Deposit Insurance; Financial Regulation; Financial Contracting Theory; Risk-SHIFTING;
    All these keywords.

    JEL classification:

    • G2 - Financial Economics - - Financial Institutions and Services
    • F3 - International Economics - - International Finance

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