Fighting the Fire: Governmental Emergency Responses to the Financial Crisis

In this article, Bernd Delahaye argues that the combined emergency responses to the banking crisis by governments in the United States and Europe in the form of liquidity support facilities, state guarantees for debt instruments issued by troubled banks and capital injections have so far successfully prevented the collapse of the world financial system. The author claims that it is now necessary to establish national ‘bad banks’ to help the banks shake off the ‘toxic’ assets that currently burden their balance sheets in order to restore the confidence of the market and to revitalise interbank lending. Delahaye further argues that a temporary nationalisation can be a useful tool to rescue systemically important banks. The medium- and long-term focus should, however, be on regulatory and structural reforms to reduce the risk of a recurrence of the current situation.