It is also important that the central bank coordinate with the Treasury or

It is also important that the central bank coordinate

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funds. It is also important that the central bank coordinate with the Treasury, or Ministry of Finance, since liquidity crisis can also have serious impacts on government securities markets. Finally these actions need to be carried out in as monetarily neutral way as possible. 2 These steps draw heavily on the experiences of the Asian countries and are discussed in great detail in Lindgren, et. al. (1999).
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- 4 - All five of the Asian crisis countries experienced withdrawals from domestic depositors and creditors as well as external creditors. In each of these countries the central bank provided liquidity under various emergency lender-of-last-resort facilities. The amounts were especially large in Indonesia and Thailand, constituting 15 and 22 percent of GDP respectively. 3 Most liquidity support was in domestic currency, except in the case of Korea where significant support was given in foreign currency. Central banks in Korea, Malaysia, and Thailand also provided liquidity support to nonbank financial institutions, such as merchant banks and finance companies. In systemic crisis, when the liquidity provided by the central bank is unable to stop the runs, the government may need to announce a blanket guarantee for depositors and creditors of banks . In those situations, where there has been a total loss of confidence in the banking sector, and where the actions of the central bank in providing liquidity have not restored confidence, there has been a need for stronger government action to reduce uncertainty. The issuance of a blanket guarantee assures creditors and depositors and, thus, allows the time for the government to begin an orderly restructuring process. It also allows the central bank to reduce the amount of liquidity support it has to provide, buys the government the time needed to organize and carry out needed bank restructuring, and preserves the integrity of the payment system. Blanket guarantees for depositors and creditors were used in many countries, including Finland, Indonesia, Korea, Malaysia, Mexico, Sweden, Thailand, and Turkey to restore confidence and to protect banks’ funding. For the blanket guarantee to be effective it must be credible. Credibility can be enhanced by stating the terms of the guarantee explicitly, and by confirming the government’s commitment by law and making it part of the macroeconomic program. In the four Asian countries where a blanket guarantee was used to stabilize bank funding and stem a run by depositors, the guarantee was introduced as soon as the severity of the crisis became apparent. The guarantee covered all depositors and creditors. However, in Thailand and Indonesia the guarantee excluded claims with related parties. 4 In Indonesia, the guarantee only applied to those domestic banks willing to sign an agreement with the central bank and the government agreeing to a number of prudential restrictions and allowing increased surveillance of the bank.
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