Banks are crucial for the availability of credit in the economy. A well-capitalized and liquid banking system can provide citizens with affordable loans to buy a home or attend university and businesses with credit to invest in state-of-the-art technology or expand their business network. When a bank fails, however, the authorities need to step in and unwind the bank’s assets in an orderly manner to prevent a broader de stabilization of the country’s financial system. Moreover, most countries have a deposit guarantee fund that can be used to reimburse deposits in the failed bank, up to a stipulated limit. Even before the authorities have unwound the troubled bank, banking sector supervisors start investigating the reasons for the bank’s collapse. Often, they come across poor risk management practices within the bank and gaps in the country’s regulatory framework that allowed the large build-up of risks to begin with. In response, supervisors issue stricter guidelines and, depending on their legal competencies, patch up the legal gaps or signal to lawmakers the changes that need to be put in place.
KeywordsEuropean Union Banking Sector Credit Default Swap Foreign Ownership Banking Supervision
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