Banking Supervision Assessment and Bailout Policies

Abstract

The actual economic and financial turmoil calls for new bailout policies to enable the governments to rescue the banking sector and contrast the crisis. The successful past reforms undergone in the International Monetary Fund to access funds in exceptional situations are the base to identify the core element for the design of an efficient decisional framework and methodology. Strict rules and guidelines together with a quantitative analysis can underpin a successful result. The entry level is critical for the credibility of a policy and in the shaping of expectations of the market over future interventions. The recent experience of the U.S. government with the Trouble Asset Relief Program offers instances of national bailout policies; the Capital Purchase Program (CPP) and the Supervisory Capital Assessment Program (SCAP) have different key characteristics. They allow to focus over transparency, timeliness, discretion, political connections and private investments flows. The empirical analysis starts inspecting these features and develops two exercises. First, the SCAP is replicated with a simplified and standardized approach to produce an only quantitative and timely applicable methodology. The empirical test confirmed that the simplified SCAP process is effective. The second exercise is a wider application of the new methodology.