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Controlling the fiscal costs of banking crises

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Author Info

  • Honohan, Patrick
  • Klingebiel, Daniela

Abstract

In recent decades, a majority of countries have experienced a systemic banking crisis requiring a major-and expensive-overhaul of their banking system. Not only do banking crises hit the budget with outlays that must be absorbed by higher taxes (or spending cuts), but they are costly in terms of forgone economic output. Many different policy recommendations have been made for limiting the cost of crises, but there has been little systematic effort to see which recommendations work in practice. The authors try to quantify the extent to which fiscal outlays incurred in resolving banking distress can be attributed to crisis management measures of a particular kind adopted by the government in the early years of the crisis. They find evidence that certain crisis management strategies appear to add greatly to fiscal costs: unlimited deposit guarantees, open-ended liquidity support, repeated recapitalization, debtor bail-outs, and regulatory forbearance. Their findings clearly tilt the balance in favor of a strict rather than an accommodating approach to crisis resolution. At the very least, regulatory authorities who choose an accommodating or gradualist approach to an emerging crisis must be sure they have some other way to control risk-taking.

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Bibliographic Info

Paper provided by The World Bank in its series Policy Research Working Paper Series with number 2441.

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Date of creation: 30 Sep 2000
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Handle: RePEc:wbk:wbrwps:2441

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Related research

Keywords: Economic Theory&Research; Banks&Banking Reform; Financial Crisis Management&Restructuring; Payment Systems&Infrastructure; Financial Intermediation; Financial Crisis Management&Restructuring; Economic Theory&Research; National Governance; Financial Intermediation; Banks&Banking Reform;

References

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  1. Gerard Caprio & Patrick Honohan, 2008. "Banking Crises," Department of Economics Working Papers 2008-07, Department of Economics, Williams College.
  2. G. G. Garcia, 1999. "Deposit Insurance," IMF Working Papers 99/54, International Monetary Fund.
  3. Patrick Honohan, 1997. "Banking system failures in developing and transition countries: Diagnosis and predictions," BIS Working Papers 39, Bank for International Settlements.
  4. 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.
  5. Ronald I. McKinnon, 1996. "The Rules of the Game: International Money and Exchange Rates," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262133180, December.
  6. Gerard Caprio & Patrick Honohan, 1999. "Restoring Banking Stability: Beyond Supervised Capital Requirements," Journal of Economic Perspectives, American Economic Association, vol. 13(4), pages 43-64, Fall.
  7. Honohan, Patrick, 1999. "A model of bank contagion through lending," International Review of Economics & Finance, Elsevier, vol. 8(2), pages 147-163, June.
  8. Demirguc-Kunt, Asli & Huizinga, Harry, 1999. "Market Discipline and Financial Safety Net Design," CEPR Discussion Papers 2311, C.E.P.R. Discussion Papers.
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  1. Honohan-Supported-Guarantee Talking Point Still Going Strong
    by Karl Whelan in The Irish Economy on 2010-10-16 21:28:17
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