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The Changing Role of Central Banks and the Role of Competition in Financial Regulation during (and in the Aftermath of) the Financial Crisis

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Abstract

Rescue cases involving guarantees (contrasted with restructuring cases) during the recent Financial Crisis, have illustrated the prominent position that the goal of promoting financial stability has assumed over that of the prevention or limitation of possible distortions of competition which may arise when granting State aid. The importance attached to maintaining and promoting financial stability—as well as the need to facilitate rescue and restructuring measures aimed at preventing systemically relevant financial institutions from failure, demonstrate how far authorities are willing to overlook certain competition policies. However, increased government and central bank intervention also simultaneously trigger the usual concerns—which include moral hazard and the danger of serving as long‐term substitutes for market discipline. How far central banks and governments should intervene and how far distortions of competition should be permitted ultimately depends on how systemically relevant a financial institution is.
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Document Type: Research Article

Affiliations: Oxford Brookes University, School of Social Sciences and Law, Headington, Oxford

Publication date: 2011-07-01

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