A Schematic View of Government as a Regulator and Insurer of the Financial System

Henri-Paul Rousseau

doi:10.22158/jepf.v7n2p54

Abstract

The purpose of this paper is to present a schematic of the interactions between the government as the REGULATOR of financial institutions and the government as the INSURER of financial institutions while considering the long-term feedback relationships between the size and the scope of the financial sector and the level of public debt resulting from financial crises over time. The analysis concludes that at certain high level of public debt and size of the expected support of the financial sector by the government, the regulator and/or the central bank may have to “stabilize” the situation, but there may be cases where the support becomes socially “unacceptable”.

Highlights

IntroductionAs well argued by Alessandri and Haldane (2009), governments have acted as liquidity insurers (lender of last resort), as deposit and capital insurers, and as a regulator
The Global Financial Crisis has revealed the complexity of the numerous relationships between the financial sector and the State
While there is a debate on the relative importance of cultural and socio-demographic factors in the rise of populism, most studies are convincing about the impact of the last financial crisis on that rise

Summary

Introduction

As well argued by Alessandri and Haldane (2009), governments have acted as liquidity insurers (lender of last resort), as deposit and capital insurers, and as a regulator. In many countries, a large part of the government debt ended up in the hands of the financial sector, which in many cases was helped by the central bank if not by the government itself This “diabolical loop”, a phrase coined by Brunnermeier et al (2016), is the topic of many debates and studies. The purpose of this paper is to present a schematic view of these interactions between the government as the REGULATOR of financial institutions and the government as the ultimate deposit and capital www.scholink.org/ojs/index.php/jepf

Objectives

Findings

Conclusion