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On the resolution of banking crises: theory and evidence

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  • Glenn Hoggarth
  • Jack Reidhill
  • Peter Sinclair

Abstract

This paper reviews the merits of the various techniques used by authorities when resolving individual or widespread bank failures in developed and emerging market economies. In particular, the various banking crisis resolution techniques available to the authorities are classified and then compared with the techniques that have been used in practice, drawing on both the available evidence and our own analysis. With individual bank failures the authorities usually first seek a private sector solution. Any losses are passed on to existing shareholders, managers and sometimes uninsured creditors, and not to taxpayers. But policy options are more limited in systemwide crises. In most recent systemwide crises, early on central banks have provided liquidity to failing banks and governments have given blanket guarantees to depositors. In nearly all cases, investor panics have been quelled but at a cost to the budget and increasing the risk of future moral hazard. Open-ended central bank liquidity support seems to have prolonged crises, thus increasing rather than reducing the output costs to the economy. Bank restructuring has usually occurred through mergers, often government assisted, and some government capital injection or increase in control. Bank liquidations have been rare and creditors - including uninsured ones - have rarely made losses. In systemwide crises, resolution measures have been more successful in financial restructuring than in restoring banks' ongoing profitability or credit to the private sector. In most cases bank lending has remained subdued for years after a banking crisis.

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Bibliographic Info

Paper provided by Bank of England in its series Bank of England working papers with number 229.

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Date of creation: Sep 2004
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Handle: RePEc:boe:boeewp:229

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  1. Honohan, Patrick & Klingebiel, Daniela, 2003. "The fiscal cost implications of an accommodating approach to banking crises," Journal of Banking & Finance, Elsevier, vol. 27(8), pages 1539-1560, August.
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Cited by:
  1. Viral Acharya & Tanju Yorulmazer, 2007. "Cash-in-the-market pricing and optimal resolution of bank failures," Bank of England working papers 328, Bank of England.
  2. Acharya, Viral V & Yorulmazer, Tanju, 2005. "Cash-in-the-Market Pricing and Optimal Bank Bailout Policy," CEPR Discussion Papers 5154, C.E.P.R. Discussion Papers.
  3. Bolzico, Javier & Mascaro, Yira & Granata, Paola, 2007. "Practical guidelines for effective bank resolution," Policy Research Working Paper Series 4389, The World Bank.
  4. David G. Mayes, 2004. "An approach to bank insolvency in transition and emerging economies," Finance 0404015, EconWPA.
  5. Imola Drigă & Codruța Dura & Ilie Răscolean, 2011. "Overview of the Caampl Early Warning System in Romanian Banking," Annals of the University of Petrosani, Economics, University of Petrosani, Romania, vol. 11(2), pages 71-80.
  6. Bojan Markovic, 2006. "Bank capital channels in the monetary transmission mechanism," Bank of England working papers 313, Bank of England.
  7. Acharya, Viral V & Yorulmazer, Tanju, 2004. "Too Many to Fail - An Analysis of Time Inconsistency in Bank Closure Policies," CEPR Discussion Papers 4778, C.E.P.R. Discussion Papers.
  8. Greg Caldwell, 2005. "An Analysis of Closure Policy under Alternative Regulatory Structures," Working Papers 05-11, Bank of Canada.
  9. Aldean, Cory, 2010. "Financial crisis response plan," MPRA Paper 28166, University Library of Munich, Germany, revised 27 Jan 2011.
  10. Misa Tanaka & Glenn Hoggarth, 2006. "Resolving banking crises - an analysis of policy options," Bank of England working papers 293, Bank of England.

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