On the Need for a Fiscal Backstop to the Banking System
This paper is published as a chapter in: Research Handbook on Crisis Management in the Banking Sector, edited by Matthias Haentjens and Bob Wessels, Cheltenham: Edward Elgar Publishing, 2015, 42-54.
Duisenberg School of Finance Policy Paper No. 44
13 Pages Posted: 25 Jul 2014 Last revised: 16 Jan 2016
Date Written: July 23, 2014
In the aftermath of the financial crisis, governments are rightly reducing their exposure to the banking system. Bail-in arrangements should ensure that shareholders and creditors take the first losses. The next line of defence is a resolution fund, which is filled via levies on banks. Nevertheless, we argue that a fiscal backstop remains necessary for a banking system, as private arrangements may not be sufficient in a severe crisis. Without a credible backstop, depositors will run on a troubled banking system causing a bad equilibrium with a full breakdown of the banking system. Only the government can provide such a credible backstop.
Keywords: Fiscal backstop, financial crisis, banking, lender of last resort, euro
JEL Classification: E58, E62, F33, G21, G28
Suggested Citation: Suggested Citation