Fiscal contingency planning for banking crises
AbstractThere is constant demand for an estimate of the likely fiscal costs of future banking crises, but little precision can be expected in such an estimate. The author shows how information that is typically available to authorities could be used to get a general sense of the order of magnitude of the direct fiscal liability. What is required for such an estimate? 1) Information about the size and composition of the bank's balance sheets. 2) Expert assessments of the accuracy of the accounting data and of specific short-term risks to which the components are known to be subject. The author's method distinguishes between losses that have already crystallized and the changing risks for the immediate future. By including contingency planning for banking collapse in their fiscal calculations, authorities may risk destabilizing expectations or worsening the moral hazard in the system. But the risks of contingency planning generally outweigh the risks of sending confused signals. Insisting on ignorance is a poor way to protect against announcement errors that trigger panic.
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Bibliographic InfoPaper provided by The World Bank in its series Policy Research Working Paper Series with number 2228.
Date of creation: 30 Nov 1999
Date of revision:
Insurance&Risk Mitigation; Banks&Banking Reform; Financial Intermediation; Payment Systems&Infrastructure; Financial Crisis Management&Restructuring; Banks&Banking Reform; Financial Intermediation; Financial Crisis Management&Restructuring; Insurance&Risk Mitigation; National Governance;
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- Patrick Honohan, 1997. "Banking system failures in developing and transition countries: Diagnosis and predictions," BIS Working Papers 39, Bank for International Settlements.
- Polackova Brixi, Hana & Shatalov, Sergei & Zlaoui, Leila, 2000. "Managing fiscal risk in Bulgaria," Policy Research Working Paper Series 2282, The World Bank.
- Brixi, Hana Polackova & Ghanem, Hafez & Islam, Roumeen, 1999. "Fiscal adjustment and contingent government liabilities : case studies of the Czech Republic and Macedonia," Policy Research Working Paper Series 2177, The World Bank.
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