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The use of blanket guarantees in banking crises

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  • Laeven, Luc
  • Valencia, Fabián

Abstract

Policymakers often use guarantees on bank liabilities to prevent or contain bank runs during systemic banking crises, but their success has been debated. Using a sample of 42 episodes of banking crises, this paper finds that blanket guarantees do help to reduce liquidity pressures on banks, but only partially since they do not stem withdrawals from non-residents. Withdrawals following the announcement of guarantees are much more pronounced for non-resident liabilities than for foreign-currency denominated deposits—which may also be held by residents—suggesting that the results on non-residents are not driven by foreign-currency risk but by concerns about the government’s ability and commitment to honor the guarantee to non-resident liability holders.

Suggested Citation

  • Laeven, Luc & Valencia, Fabián, 2012. "The use of blanket guarantees in banking crises," Journal of International Money and Finance, Elsevier, vol. 31(5), pages 1220-1248.
  • Handle: RePEc:eee:jimfin:v:31:y:2012:i:5:p:1220-1248
    DOI: 10.1016/j.jimonfin.2012.01.014
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    More about this item

    Keywords

    Banking crisis; Crisis resolution; Blanket guarantee; Moral hazard;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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