Banking Crises, Implicit Government Guarantees, and Optional Insurance
AbstractAfter major banking crisis, investors and academics alike are left wondering how it could have been avoided. Crises can take an enormous toll on society. Mexico's 1994 crisis cost almost 10% of GDP. Chile's 1983 crisis was even worse, with the ¯nal cost amounting to a stunning 30% of GDP. Moreover, the economy can experience a traumatic recovery process that in some cases lasts several years. The most common explanation of banking crises focuses on the anticipation of government bail out. This mechanism takes place when investors expect that the government will help them cover their losses in case they face a generalized adverse shock. The paper shows how an insurance scheme eliminates the externality generated by the above government bail out policy. As an example, the paper analyzes the case of liquidity risk, de¯ned as an unexpected cash withdrawal, and it presents a scheme to deal with this risk. This scheme works as an insurance where each bank pays a premium depending on the bank's risk. The scheme used in Argentina where the Central Bank charges to each bank a premium to insurance their liquidity risk, for an insurance which the Central Bank acquires in the international markets is an empirical example. In addition, a new procedure is developed to estimate the social cost of a bank crisis which is di®erent from the net transfer from the government to the banking sector and independent of the existence of the crisis.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by Universidad del CEMA in its series CEMA Working Papers: Serie Documentos de Trabajo. with number 159.
Date of creation: Nov 1999
Date of revision:
Contact details of provider:
Postal: Av. Córdoba 374, (C1054AAP) Capital Federal
Phone: (5411) 6314-3000
Fax: (5411) 4314-1654
Web page: http://www.cema.edu.ar/publicaciones/doc_trabajo.html
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Edwards, Sebastian & Vegh, Carlos A., 1997.
"Banks and macroeconomic disturbances under predetermined exchange rates,"
Journal of Monetary Economics,
Elsevier, vol. 40(2), pages 239-278, October.
- Sebastian Edwards & Carlos A. Végh, 1997. "Banks and Macroeconomic Disturbances Under Predetermined Exchange Rates," CEMA Working Papers: Serie Documentos de Trabajo. 115, Universidad del CEMA.
- Sebastian Edwards & Carlos A. Vegh, 1997. "Banks and Macroeconomics Disturbances under Predetermined Exchange Rates," NBER Working Papers 5977, National Bureau of Economic Research, Inc.
- Guillermo A. Calvo & Leonardo Leiderman & Carmen M. Reinhart, 1993.
"Capital Inflows and Real Exchange Rate Appreciation in Latin America: The Role of External Factors,"
IMF Staff Papers,
Palgrave Macmillan, vol. 40(1), pages 108-151, March.
- Leonardo Leiderman & Carmen Reinhart & Guillermo Calvo, 1992. "Capital Inflows and Real Exchange Rate Appreciation in Latin America: The Role of External Factors," IMF Working Papers 92/62, International Monetary Fund.
- Reinhart, Carmen & Calvo, Guillermo & Leiderman, Leonardo, 1993. "“Capital Inflows and Real Exchange Rate Appreciation in Latin America: The Role of External Factors," MPRA Paper 7125, University Library of Munich, Germany.
- Merton, Robert C., 1977. "An analytic derivation of the cost of deposit insurance and loan guarantees An application of modern option pricing theory," Journal of Banking & Finance, Elsevier, vol. 1(1), pages 3-11, June.
- Xavier Freixas & Jean-Charles Rochet, 1997. "Microeconomics of Banking," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262061937, January.
- Diamond, Douglas W & Dybvig, Philip H, 1983.
"Bank Runs, Deposit Insurance, and Liquidity,"
Journal of Political Economy,
University of Chicago Press, vol. 91(3), pages 401-19, June.
- Mullins, Helena M. & Pyle, David H., 1994. "Liquidation costs and risk-based bank capital," Journal of Banking & Finance, Elsevier, vol. 18(1), pages 113-138, January.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Valeria Dowding).
If references are entirely missing, you can add them using this form.