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10 - Deposit Protection and the Lender of Last Resort

from Part V - Resolution Regimes and Crisis Management Mechanisms

Published online by Cambridge University Press:  25 August 2022

Evan Gibson
Evan Gibson
Affiliation:
The University of Hong Kong
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Summary

Managing banking sector liquidity in financial crises has historically depended on deposit protection and the lender of last resort. Deposit protection assuages market panics by guaranteeing that depositors will be paid if a bank fails. The lender of last resort is a capital injection to preclude a failure when an illiquid yet solvent bank has exhausted all other funding sources. This chapter analyzes deposit protection, the lender of last resort, and how different supervisory structures influence the implementation of these bank stabilization tools. Moreover, certain structures can adversely affect supervisors from fulfilling their financial stability mandates. Hong Kong is susceptible to a supervisory coordination failure from a statutory friction that prioritizes monetary over banking stability. A tension is created within the Hong Kong Monetary Authority which could compel the Financial Secretary to usurp control during a financial crisis. This tension exposes the Hong Kong Monetary Authority to macro-prudential underlap which could undermine its financial stability mandate. Despite these flaws, the statutory mandates of the Hong Kong Monetary Authority complement Hong Kong’s deposit protection and lender-of-last-resort policies, which have performed faultlessly over the past 20 years. However, neither approach has been sufficiently tested during this period.

Keywords

Deposit insurancelender of last resortbank crisesNorthern Rockbank regulationfinancial regulationbank runsfinancial stabilityresolution regimescentral banks
Type
Chapter
Information
A Regulatory Design for Financial Stability in Hong Kong , pp. 197 - 216
Publisher: Cambridge University Press
Print publication year: 2022

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