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This paper first discusses the causes of the current banking crisis. It then examines alternative public sector interventions in the banking sector, distinguishing solvency, liquidity and funding support. The paper recommends using two main tools to combat the crisis. The first is to use the flexibility of the central bank balance sheet to conduct a mass purchase of senior structured credit assets. The second stage is the introduction of long term government backed insurance. It also provides some reflections on the relationship between government and the banking industry post-crisis and whether similar government backed re-insurance against systemic risk is appropriate for the pension and life insurance industries.
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