Edited by John Raymond LaBrosse, Rodrigo Olivares-Caminal and Dalvinder Singh
Chapter 2: Improving the decision-making framework for financial crisis management
Public confidence plays an important role in sustaining financial system stability. In normal times prudential regulation and supervision of banks, the promotion and use of standards of sound business and financial practice, central bank actions, explicit deposit protection and an effective bank closure mechanism all help to reduce the adverse consequences of a financial crisis emanating from bank failures. It is understood that banks, like other firms, will fail and the likelihood of this happening is higher when risks in a particular banking concern are not managed appropriately, bubbles in certain markets burst, or financial markets are very fragile due to either domestic or foreign reasons. In an astonishing chronicle of eight centuries of financial crisis Reinhart and Rogoff explored the question as to whether the current one is really any different. What is becoming quite clear is that very little attention is given as to how best to manage them. One explanation could be that one crisis seems to lead to another and so it is difficult to determine the endpoints.
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