Schich, Sebastian --- "The Government as Guarantor of Last Resort: Benefits, Costs and the Case for Premium Charges" [2011] ELECD 488; in LaBrosse, Raymond John; Olivares-Caminal, Rodrigo; Singh, Dalvinder (eds), "Managing Risk in the Financial System" (Edward Elgar Publishing, 2011)

Book Title: Managing Risk in the Financial System

Editor(s): LaBrosse, Raymond John; Olivares-Caminal, Rodrigo; Singh, Dalvinder

Publisher: Edward Elgar Publishing

ISBN (hard cover): 9780857933812

Section: Chapter 3

Section Title: The Government as Guarantor of Last Resort: Benefits, Costs and the Case for Premium Charges

Author(s): Schich, Sebastian

Number of pages: 23

Extract:

3. The government as guarantor of last
resort: benefits, costs and the case
for premium charges1
Sebastian Schich

3.1. INTRODUCTION

At the core of the policy apparatus for responding to financial crises is
the financial system safety net. That safety net has traditionally been
defined as comprising three major elements (or functions) ­ a lender-of-
last-resort, deposit insurance, combined with a regulatory and supervisory
framework.2 The array of these three functions is performed by several
institutions, typically involving the finance ministry, the central bank, a
supervisory agency and a deposit insurance agency. The funding of the
safety net is provided in a variety of ways by governments, central banks
and fees from regulated firms.
Banks will fail and due to the particular nature of their liabilities
special resolution regimes are often necessary. In several cases resolu-
tion of a problem bank is undertaken by deposit protection agencies
under special legislative authorities. Where such regimes exist, it has
been shown that involvement of the deposit insurer tends to damp the
negative (moral hazard) effect that deposit insurance has on banks' risk
taking.3 Thus, subsuming special bank failure resolution regimes under
the deposit insurance function could be justified on the grounds of insti-
tutional considerations. In any case, bank failure resolution issues are not
part of the focus of the present chapter, although it is noted here that the
recent crisis has highlighted once again that the lack of the availability
of special resolution tools that allow authorities ...