A Schematic View of Government as a Regulator and Insurer

The purpose of this paper is to present a schematic view of these interactions between the government as the REGULATOR of financial institutions and the government as the ultimate deposit and capital INSURER, while taking into account the long-term feedback relationship between the size and the scope of the financial sector and the level of the public debt. [...] As such, the chosen regulations will determine the slope and the shape of the relationship between the scope of the financial sector (Y1) and the expected value of the size of the government support needed in case of a financial crisis (X1) as illustrated in Mapping 1 of Graph A. [...] Indeed, the total loans of the financial sector to the private sector, net of the financing within the financial sector, are a good measure of the liabilities of the non-financial sector. [...] But the size and the degree of globalization of the economy, the pattern of previous financial crises in the country and the historical period under review, will also be determinants of the position of the Capacity Frontier of each country. [...] Regulatory Regimes and the Role of the Central Bank Graph A exemplifies the long-term relationships between the financial regulation regimes (scope, institutions and products/markets), the size of the financial sector, the level of the public debt and the expected value of the government support to the financial sector in the event of a financial crisis for a given level of central bank monetizati.