Introduction

This paper reviews recent state interventions in financial crises with particular emphasis on the Asian crisis experience in the late 1990s and the current turmoil. Based on these experiences, this paper outlines a number of lessons for the state's role in crisis management even while recognizing that the modalities of crisis resolution invariably differ across countries and crises. The first section (Section 2) reviews the state's role as an ex ante and ex post protector of the financial system and the problems in seeking to pre-commit to crisis management strategies. The next section (Section 3) reviews the official responses to the financial crises that struck the region in the late 1990s and the ongoing global financial turmoil. For ease of exposition, crisis management is considered during the three key stages of any crisis—stabilization and containment, asset write downs and absorption, and rehabilitation and normalization—with different tools and instruments at the forefront of each stage and different state entities in the driver's seat. Following this, the next section (Section 4) outlines a number of broad principles or lessons that can help guide crisis management and argues for expanding the tools available to involve the private sector in crisis resolution, creating procedures to allow for the orderly closure of systemically important financial firms, and integrating more closely ex ante and ex post systemic risk oversight. Finally, the last section (Section 5) argues for the creation of high-level systemic risk councils (SRCs) in each country that would oversee systemic risk in both tranquil and turbulent times, coordinate the roles of various state bodies, including the central bank, and ensure a holistic approach to systemic risk management and containment.

Download this Paper [ PDF 189.4KB| 29 pages ].

Comment(s)

There are [0] comment(s) for this entry. Post a comment.