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Robust Exit Policies to Underpin Market Discipline

In: Improving Banking Supervision

Author

Listed:
  • David G. Mayes
  • Liisa Halme
  • Aarno Liuksila

Abstract

Two main issues relate to the appropriate handling of problems and crises. The first concerns the incentives suggested for banks to avoid getting into difficulties in the first place. The second relates to the issues addressed by the authorities in running a system where such difficulties can be handled swiftly and smoothly without damaging the credibility of the financial system as a whole. However well run the banks and however vigilant the authorities, problems will still occur, because banking involves taking risks. Even with well-managed risks and good information about borrowers one can be unlucky. Financial accidents will occur, but their size and incidence can be reduced by robust exit policies. There is, a distinction between those general measures aimed at preventing bank failure in the first place, and the exit policies that address the problem of preventing further losses, in the event of default or failure on the part of a bank. A role for government is warranted in minimising the costs to society and organising the means for a fair distribution of the loss.

Suggested Citation

  • David G. Mayes & Liisa Halme & Aarno Liuksila, 2001. "Robust Exit Policies to Underpin Market Discipline," Palgrave Macmillan Books, in: Improving Banking Supervision, chapter 8, pages 198-215, Palgrave Macmillan.
    • Handle: RePEc:pal:palchp:978-0-230-28819-5_8
    DOI: 10.1057/9780230288195_8
    as

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