This paper studies the rationale behind prudential policies in the banking sector. The main components of these prudential policies are deposit insurance, solvency regulations, and emergency liquidity assistance by the central bank, acting as a lender of last resort. We discuss the institutional arrangements that are necessary to limit the frequency and extent of individual bank failures as well as those of systemic banking crises.
Keywords: Banking supervision; Prudential regulation; Financial stability
Views expressed in the paper are those of the authors and do not necessarily reflect those of the Bank of Japan or Institute for Monetary and Economic Studies.