Financial Safety Nets: Their Roles and Effects on Market Discipline of Banks

The paper looks at two specific types of safety nets: lender of last resort and depositor protection. Also discussed is the structure of the financial sector: where prudential supervision should sit within the organizational structure. This is followed by a comparison of the situation in the four countries under study.

The author concludes that safety nets are a flawed and imperfect means of preventing a repeat of the expensive 1997-1998 bail-outs of financial sectors in East Asia. The main thrust of policy should be towards creating a resilient financial sector and a strong and independent prudential supervision.

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