The Impact of Crisis Trends in Banking on Expanding Financial Safety Net

Abstract

Stable and efficient functioning of financial institutions, especially banking institutions, requires the existence of an adequate regulatory framework. The differences in the character and functioning of financial institutions caused differences in the regulatory approaches for maintaining stability and efficiency, whereby one should bear in mind that even within a concrete financial system, the regulatory framework evolves in order to be able to respond to new trends in the financial services sector. A growing homogenization of activities and a less noticeable difference among financial institutions caused the financial safety net to expand to non-bank financial institutions in order to maintain financial stability. The aim of this paper is to consider the justification and implications of such an expansion. Considering the fact that financial safety net „expansion“ stimulates riskier behaviour of protected institutions, this paper offers suggestions for dealing with this problem in order to reduce it as much as possible.