'One Size Does Not Fit All' Institutional Determinants of Financial Safety Net Effectiveness

Abstract

The main objective of this study is to identify both similarities and differences among seemingly homogenous countries (OECD) in respect to their safety net design and a supervisory role played by central banks. The goal is achieved using an extensive data set, describing financial supervisory institutions between 2000-2013, hence including recent modifications in response to global financial crisis. The data show the existence of similar supervisory standards in both crisis- and non-crisis countries. Whether it is a presence of a single supervisory authority, allocation of macroprudential responsibilities in a country, or implementing capital adequacy requirements, while working well in certain countries, did not make others immune to a crisis. At the same time, data show that non-crisis countries implemented stricter rules than those in crisis-countries, and that this process started way before the burst of Global Financial Crisis. Often, these more rigorous rules were observed in countries with past crisis experience, indicating an importance of learning mechanism. With empirical analysis, we prove that certain basic safety net elements (obligatory reserve requirements of sufficient coverage of deposit insurance scheme), as well as high level of central bank financial transparency are negatively correlated with the speed of credit growth. Based on results and discussion on previous empirical analyses we give recommendations for institutions involved in the financial safety net.