Early intervention regimes: the balance between rules vs discretion
The author touches upon the evolution, nature and use of early intervention frameworks including their role during the financial crisis. A balance between rules versus discretion is needed: On the one hand, well designed enforcement actions that address the root cause of identified problems can help to rehabilitate a bank when bank management might still be at the denial stage. On the other hand, acting too early, too explicitly and too forcefully might result in the “medicine killing the patient” and in triggering unintended effects on other institutions. In other words, policymakers always need to weigh the costs of early intervention measures (ie the risk that premature, heavy-handed action may accelerate a bank’s demise) against the benefits (ie promptly and forcefully addressing a bank’s viability to reduce losses to the society).
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