Banking crises and the design of safety nets

Abstract

Governments face conflicting objectives in terms of the provision and design of safety nets for banking systems. Safety nets may reduce market discipline and can thus increase the likelihood of a banking crisis. But safety nets are adopted because of the perceived benefits they will confer in either preventing a weak banking system from spilling over into a full-blown crisis or in enabling the government to handle a crisis more effectively. This paper provides evidence on the effects of government safety nets on both these aspects and discusses implications for policy.