FINANCIAL SECTOR DISTRESS AND POLICYMAKING

Abstract

The purpose of this thesis is to attempt to determine how policymakers should respond to incidents of financial crisis. It finds that during such times policymakers are faced with two critical tasks. These are to identify and appropriately address the issues critical to the crisis and secondly to ensure the sector reaches a new equilibrium. It finds the first task to be important given the resource constraints of policymakers and distinguishes it from addressing the causes of the crisis. The thesis also suggests that to address the second task it is important the policymakers understand three fundamental pillars of financial sector stability and development. The importance and precise nature of these tasks are illustrated using evidence from the Asian Financial Crisis and the U.S. Savings and Loans Crisis. In addition to identifying these tasks, the thesis proposes policymaking frameworks to address each of the identified tasks. These frameworks are developed from a critical reading of the relevant literature and a study of the cases reviewed.