The State and the Banking Safety Net

Abstract

With the banking institutions playing such a central role in the financial system in China, a safety net¹ is crucial to ensuring the prompt resolution of any crisis touching on the central nerve of the economy. As mentioned by Wu Xiaoling in an interview (Ye W. and Hu J., 2006), the banking industry in China needs a functioning and efficient exit mechanism: ‘In a market economy, only if there is a pressure to exit a market, is there a good incentive for operations; [the pressure] improves the healthiness of operations of financial institutions, optimises the allocation of financial resources, and protects the system from financial instability.’