But let me be very clear about one thing – banks are not saved because they in themselves deserve to be saved. On the contrary, their managers and shareholders have usually played a decisive role in getting the bank into trouble in the first place. Some banks are saved because they are necessary for the real economy to operate. Actually, governments do not save banks, but rather the functions that banks provide to society. But you can never be entirely sure in advance how the financial system (and ultimately the real economy) will be affected by a bank failure. In other words, knowing which banks to save and which ones to let go is complicated. You need to weight the costs of unsettling the financial system in relation to the costs of saving the bank. This is not an easy task. But despite the substantial uncertainty, you can be sure of one thing – whether you let a large bank fail or rescue it, either way you will incur substantial costs and I am not only talking about financial costs but also about social dislocations! BIS Review 50/2010  5  However, deciding to save a bank does not imply being spendthrift. On the contrary, being economically savvy is my third – and perhaps most important – principle of crisis management. So how does that principle manifest itself in practical actions? Thankfully, history offers us a number of both good and bad examples from which several useful lessons can be drawn.
The first lesson is to perform a thorough due diligence to clarify the extent of the problem in the troubled bank. But, in line with my previous principle, ideally you need to do this fast. Once you have a firm grasp of the bank’s difficulties, its time to carefully assess your support options. This assessment will, of course, include direct costs, but indirect consequences for the financial markets and the overall economy should also be taken into account. The second lesson is to opt for the least-cost solution. This may sound obvious, but many examples show that the lesson is not always heeded by decision-makers. In some cases, a least-cost solution means a state guarantee against losses on assets or a funding guarantee. But when that does not suffice, brokering a private solution – such as a takeover from another, sounder bank – is another option. This usually also includes some elements of guarantee in order to sweeten the deal for the acquiring bank. But guarantees may skew the incentive, so you need to tread carefully. Such skewed incentives are, in fact, good examples of the indirect costs you need to weigh in your assessment of alternative solutions. If neither of these solutions is possible, you are simply left with one single option – injecting capital into the bank. Textbooks in economics typically describe the functioning of central banks as lenders of last resort.