Elements of the safety net in the function of achieving financial and banking stability
Project leader: Stella Suljić Nikolaj, PhD, Assistant Professor
Project value: 7.000,00 HRK / 929,06 EUR
Duration of the project: 20/12/2022-20/12/2023
Abstract
The concept of a safety net implies three elements: regulation and
supervision, the central bank as the lender of last resort and the
deposit insurance system, which enable stability in the banking and more
broadly, the entire financial system. Regulation and supervision play
the most important role in achieving stability, as evidenced by previous
crises. Their operations limit the risk of individual institutions and
seek to prevent systemic risks in the banking system. During crisis, the
last resort for banks is the central bank, which provides liquidity
assistance to banks in need. This role was played by central banks in
many historical crises as well as the crisis 2008 when central banks
helped large and systemically important banks to not spill over into the
entire banking system. Crisis caused by pandemic COVID-19, banks faced
better capitalized and more liquid than in the crisis 2008. Therefore,
instead of acting as a lender of last resort, central banks have become
the main driver of national economies that have defined and implemented
aid measures. In the pandemic, with central banks, assistance to euro
area states was provided by the European Stabilization Mechanism and the
Banking Union, which are forms of regulation that emerged after the
previous crisis 2008. The deposit insurance system as a form of banking
regulation is important in times of crisis because it protects
depositors, and banking system from the panic of depositors and the
consequent withdrawal of deposits from banks. Also, the deposit
insurance system can encourage additional risk in banking, which
confirms the need for regulation in limiting the assumption of increased
risks by banks. The project will analyze the impact of central banks
and their monetary policy in the context of the pandemic in achieving
financial stability. The importance of banking regulation and
supervision and the differences in them between conventional and Islamic
banks will also be explored, which is a continuation of previous
research. The main part of the project is a comparative analysis of the
deposit insurance system in the EU states and the countries of Southeast
Europe in achieving financial stability, which will be examined by a
dynamic panel analysis (Arellano-Bond). The project will prove the
scientific hypothesis that in the conditions of crisis, as well as
during a pandemic COVID -19, the elements of the safety net,
significantly contribute to the preservation of financial stability.
