Guarantees have become the preferred instrument to address many financial policy objectives. The recent financial crisis has put the spotlight on the use of guarantees as a policy tool to support financial stability. But arrangements that guarantee certain financial claims exist even during normal times. Many of them reflect the pursuit of specific financial policy objectives other than supporting financial stability, such as protecting consumers or influencing credit allocation to achieve preferred outcomes. A key finding of this report is that guarantee arrangements for financial claims, including in particular those that provide protection against the risk that a counterparty to a financial contract will not make the promised payment to the other party due to institutional failure or other reasons, have become an intervention mechanism of choice to address the various policy objectives mentioned above. As a result, the incidence of such arrangements has undergone a marked increase over the past few decades. Policymakers are currently considering additional guarantee schemes for specific types of financial claims. In each case, guarantee arrangements would address a different mix of financial policy objectives and cover different types of risk; thus, the pros/cons of and the alternatives to introducing a new arrangement differ depending on the type of claim under consideration. That said, some considerations are common to all guarantees, and this report proposes a simple general framework consisting of four criteria (effect on incentives, effect on competition, consistency, and affordability) that policymakers should take into account when considering the introduction of new guarantee arrangements.

The financial systemic safety net was at the core of the policy response to the recent financial crisis, with the safety net being adjusted significantly in response to that crisis. Much of that adjustment consisted of extending the scope of the lender-of-last-resort and deposit insurance functions, which was reflected in increases in central bank balance sheets, the introduction of new officially supported guarantees and the expansion of existing ones. The government and the central bank together, in line with their roles as ultimate providers of capital and liquidity in a situation of a systemic crisis, acted as guarantors of last resort for financial claims on (and held by) financial institutions, especially where the latter were considered systemically important. This policy was an extraordinary response to an extraordinary financial crisis.