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• As the credit crisis has escalated, governments have taken decisive action, initiating large-scale banks’ rescue plans, commensurate with the scale of the crisis.
• The focus of these plans is threefold: (a) recapitalization of banks with public money, (b) state guarantees for bank debt and (c) enhanced liquidity provided by central banks.
• In our view, these policy measures have a good chance to contain the banking crisis, because they attack directly the two main problems creating financial mess, namely solvency and liquidity issues in the banking sector.