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Responding to Banking Crises

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  • Enrica Detragiache
  • Giang Ho

Abstract

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.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 10/18.

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Length: 33
Date of creation: 01 Jan 2010
Date of revision:
Handle: RePEc:imf:imfwpa:10/18

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Keywords: Bank restructuring; Banking sector; Economic growth; Economic models; Economic recovery; Governance; Government expenditures; Public finance; Stabilization measures; deposit insurance; recapitalization; pre-crisis; debt crisis; currency crisis; crisis episodes; banking system; crisis resolution; bank recapitalization; asset management; asset management companies; financial crises; financial crisis; deposit insurance scheme; regulatory forbearance; crisis management; bank depositors; crisis recovery; bank credit; post-crisis period; resolution of banking crises; systemic financial crises; post-crisis growth; sovereign debt crisis; systemic bank restructuring; nationalization of banks; systemic banking crisis; bank nationalization; bank runs; financial distress; systemic banking crises; bank assets; crisis intervention; asset management company; capital account liberalization; bank closure; crisis management strategies; banking systems; crisis country; banking practices; financial risk; recession; bank shareholders; bank stakeholders; bank recapitalizations; banking institutions; containment phase; bank liabilities; currency crisis indicator; bank claims; bank policy; bank of england; cross-country experience; bank deposits; financial restructuring; bank creditors;

This paper has been announced in the following NEP Reports:

References

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  1. Asli Demirgüç-Kunt & Enrica Detragiache, 1998. "The Determinants of Banking Crises in Developing and Developed Countries," IMF Staff Papers, Palgrave Macmillan, vol. 45(1), pages 81-109, March.
  2. Dell''Ariccia, Giovanni & Detragiache, Enrica & Rajan, Raghuram G, 2005. "The Real Effect of Banking Crises," CEPR Discussion Papers, C.E.P.R. Discussion Papers 5088, C.E.P.R. Discussion Papers.
  3. Glenn Hoggarth & Ricardo Reis & Victoria Saporta, 2001. "Costs of banking system instability: some empirical evidence," Bank of England working papers, Bank of England 144, Bank of England.
  4. Persson, Torsten & Roland, Gérard & Tabellini, Guido, 1997. "Comparative Politics and Public Finance," CEPR Discussion Papers, C.E.P.R. Discussion Papers 1737, C.E.P.R. Discussion Papers.
  5. Honohan, Patrick & Klingebiel, Daniela, 2003. "The fiscal cost implications of an accommodating approach to banking crises," Journal of Banking & Finance, Elsevier, Elsevier, vol. 27(8), pages 1539-1560, August.
  6. Michael M. Hutchison & Ilan Neuberger, . "How Bad Are Twins? Output Costs of Currency and Banking Crises," EPRU Working Paper Series, Economic Policy Research Unit (EPRU), University of Copenhagen. Department of Economics 02-09, Economic Policy Research Unit (EPRU), University of Copenhagen. Department of Economics.
  7. Djankov, Simeon & McLiesh, Caralee & Shleifer, Andrei, 2007. "Private credit in 129 countries," Journal of Financial Economics, Elsevier, Elsevier, vol. 84(2), pages 299-329, May.
  8. Reinhart, Carmen & Kaminsky, Graciela, 1999. "The twin crises: The causes of banking and balance of payments problems," MPRA Paper 14081, University Library of Munich, Germany.
  9. Edward J. Frydl, 1999. "The Length and Cost of Banking Crises," IMF Working Papers 99/30, International Monetary Fund.
  10. Bernardin Akitoby & Thomas Stratmann, 2008. "Fiscal Policy and Financial Markets," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 118(533), pages 1971-1985, November.
  11. Valerie Cerra & Sweta Chaman Saxena, 2008. "Growth Dynamics: The Myth of Economic Recovery," American Economic Review, American Economic Association, American Economic Association, vol. 98(1), pages 439-57, March.
  12. Domac, Ilker & Martinez Peria, Maria Soledad, 2003. "Banking crises and exchange rate regimes: is there a link?," Journal of International Economics, Elsevier, Elsevier, vol. 61(1), pages 41-72, October.
  13. Douglas Staiger & James H. Stock, 1994. "Instrumental Variables Regression with Weak Instruments," NBER Technical Working Papers, National Bureau of Economic Research, Inc 0151, National Bureau of Economic Research, Inc.
  14. Ceyla Pazarbasioglu & Claudia Helene Dziobek, 1997. "Lessons From Systemic Bank Restructuring," IMF Working Papers 97/161, International Monetary Fund.
  15. Persson, Torsten & Tabellini, Guido, 1999. "The size and scope of government:: Comparative politics with rational politicians," European Economic Review, Elsevier, Elsevier, vol. 43(4-6), pages 699-735, April.
  16. Cecchetti, Stephen G & Kohler, Marion & Upper, Christian, 2009. "Financial Crises and Economic Activity," CEPR Discussion Papers, C.E.P.R. Discussion Papers 7495, C.E.P.R. Discussion Papers.
  17. Craig O. Brown & I. Serdar Dinç, 0. "Too Many to Fail? Evidence of Regulatory Forbearance When the Banking Sector Is Weak," Review of Financial Studies, Society for Financial Studies, Society for Financial Studies, vol. 24(4), pages 1378-1405.
  18. Klingebiel, Daniela & Kroszner, Randall S & Laeven, Luc, 2006. "Banking Crises, Financial Dependence and Growth," CEPR Discussion Papers, C.E.P.R. Discussion Papers 5623, C.E.P.R. Discussion Papers.
  19. Reinhart, Carmen & Rogoff, Kenneth, 2009. "Banking Crises: An Equal Opportunity Menace," CEPR Discussion Papers, C.E.P.R. Discussion Papers 7131, C.E.P.R. Discussion Papers.
  20. James H. Stock & Motohiro Yogo, 2002. "Testing for Weak Instruments in Linear IV Regression," NBER Technical Working Papers, National Bureau of Economic Research, Inc 0284, National Bureau of Economic Research, Inc.
  21. Demirguc-Kunt, Asli & Detragiache, Enrica & Gupta, Poonam, 2000. "Inside the crisis : an empirical analysis of banking systems in distress," Policy Research Working Paper Series 2431, The World Bank.
  22. Fabian Valencia & Luc Laeven, 2008. "Systemic Banking Crises," IMF Working Papers 08/224, International Monetary Fund.
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Citations

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Cited by:
  1. Davide, Furceri & Aleksandra, Zdzienicka, 2010. "Banking Crises and Short and Medium Term Output Losses in Developing Countries: The Role of Structural and Policy Variables," MPRA Paper 22078, University Library of Munich, Germany.
  2. Athanasios Tagkalakis, 2012. "The effects of financial crisis on fiscal positions," Working Papers, Bank of Greece 145, Bank of Greece.
  3. Furceri, Davide & Zdzienicka, Aleksandra, 2012. "Banking Crises and Short and Medium Term Output Losses in Emerging and Developing Countries: The Role of Structural and Policy Variables," World Development, Elsevier, Elsevier, vol. 40(12), pages 2369-2378.
  4. Athanasios O. Tagkalakis, 2014. "Financial stability indicators and public debt developments," Working Papers, Bank of Greece 179, Bank of Greece.
  5. Maria Th. Kasselaki & Athanasios O. Tagkalakis, 2013. "Financial soundness indicators and financial crisis episodes," Working Papers, Bank of Greece 158, Bank of Greece.

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