The financial system safety net and stakeholders: overseeing macro and micro prudential supervision

Dr Dalvinder Singh and John Raymond LaBrosse,School of Law, University of Warwick.

Introduction

It is understood that banks, like other firms, will fail ¹ 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 almost all circumstances private sector solutions, such as rights issues or mergers, should be pursued in the first instance to deal with problem or failing banks, as in most cases they can limit the pressure on the financial system safety net (FSN). However, when problems become systemic governments tend to play a much more active role and call upon the agencies that make up the FSN to undertake extraordinary measures. Intervention can take a variety of forms. As such, there is a clear need for officials to undertake coherent contingency planning, financial risk assessment and crisis management. A significant development on that front has been the introduction of financial stability forums in the form of committees in individual countries to oversee agencies within the official safety net and improve how they govern macro-prudential and micro-prudential issues (Nier et al 2011) ². However, financial stability committees are not new and the reinvigoration of a formal oversight body is unlikely to fulfil all that is expected of it. This gives rise to an expectations gap, which we explore.