Responding to Banking Crises: Lessons From Cross-Country Evidence

Abstract

This Working Paper should not be reported as representing the views of the IMF. The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate. A common legacy of banking crises is a large increase in government debt, as fiscal resources are used to shore up the banking system. Do crisis response strategies that commit more fiscal resources lower the economic costs of crises? Based on evidence from a sample of 40 banking crises we find that the answer is negative. In fact, policies that are riskier for the government budget are associated with worse, not better, post-crisis performance. We also show that parliamentary political systems are more prone to adopt bank rescue measures that are costly for the government budget. We take advantage of this relationship to instrument the policy response, thereby addressing concerns of joint endogeneity. We find no evidence that endogeneity is a source of bias.

Determinants of the real impact of banking crises: A review and new evidence

“…For CS5, support policies are no longer significant, while the results for CS1 confirm that liquidity support causes crises to be more severe. The latter finding is in line with the results reported by Detragiache and Ho (2010). 9 All other variables in our analysis -except (by definition) currency crisis, the change in public expenditures and trade growth -have been lagged, which reduces endogeneity (similar to e.g.…”

“…9 Severe banking crises may trigger policies, such as recapitalization and liquidity support (Honohan and Klingebiel, 2003). Similarly, governments may be less likely to put government funds at risk when a crisis is mild (Detragiache and Ho, 2010). To deal with this issue, we follow Detragiache and Ho (2010) who argue that countries with presidential systems and countries with small governments are less inclined to pursue bank support policies.…”

“…Similarly, governments may be less likely to put government funds at risk when a crisis is mild (Detragiache and Ho, 2010). To deal with this issue, we follow Detragiache and Ho (2010) who argue that countries with presidential systems and countries with small governments are less inclined to pursue bank support policies. In presidential systems, the accountability to the electorate is higher, which may make it more difficult to implement bank support (Persson et al, 2000).…”

The Consequences of Banking Crises for Public Debt

“…Nonetheless, we think that this analysis completes previous studies in the literature (e.g. Deatragiache and Ho ) and provides some useful information.…”

Banking Crises and Short and Medium Term Output Losses in Emerging and Developing Countries: The Role of Structural and Policy Variables

“…Similarly, Cerra, Panizza, and Saxena (2009) find that the speed of recovery from financial crises is positively correlated with the fiscal and monetary stimuli implemented to counter the crisis, and depends on the type of exchange rate regime. Deatragiache and Ho (2010) find that bank-support policies that commit government resources tend to be associated with worse economic outcomes.…”