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Banking Crisis Solutions Old and New

In 2007 Britain experienced its first run on a bank of any macroeconomic significance since 1866. This was not dealt with by the method that had maintained banking stability for so long: letting the bank fail but supplying abundant liquidity to the markets to prevent contagion. In this paper the authors examine why that traditional solution was not used and propose changes to Britain’s deposit insurance system, to its bank insolvency regime, and in arrangements to allow customers access to banking services should their bank be closed—so that the traditional approach can once more be used to mitigate moral hazard.

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