Blanket Guarantees: What next?

Editor’s note: The World Bank Group has just released the fourth paper in its Crisis Response series, which aims to chart a path out of the crisis. This current release discusses deposit insurance and government guarantees of other bank liabilities, and possible strategies for winding down the blanket guarantees issued during the crisis.

The expansion of deposit insurance and introduction of debt guarantees have played a crucial role in containing the financial crisis while giving governments time to develop suitable policy responses. But these measures do not address the root causes of the crisis, and they lead to competitive distortions, moral hazard, and large fiscal contingent liabilities. Rolling them back is likely to require an internationally coordinated effort—and an answer to the important question, “exit to what?”

To download a PDF of the paper, please click here.