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On the resolution of banking crises: theory and evidence

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  • Glenn Hoggarth
  • Jack Reidhill
  • Peter Sinclair

Abstract

This paper reviews the merits of the various techniques used by authorities when resolving individual or widespread bank failures in developed and emerging market economies. In particular, the various banking crisis resolution techniques available to the authorities are classified and then compared with the techniques that have been used in practice, drawing on both the available evidence and our own analysis. With individual bank failures the authorities usually first seek a private sector solution. Any losses are passed on to existing shareholders, managers and sometimes uninsured creditors, and not to taxpayers. But policy options are more limited in systemwide crises. In most recent systemwide crises, early on central banks have provided liquidity to failing banks and governments have given blanket guarantees to depositors. In nearly all cases, investor panics have been quelled but at a cost to the budget and increasing the risk of future moral hazard. Open-ended central bank liquidity support seems to have prolonged crises, thus increasing rather than reducing the output costs to the economy. Bank restructuring has usually occurred through mergers, often government assisted, and some government capital injection or increase in control. Bank liquidations have been rare and creditors - including uninsured ones - have rarely made losses. In systemwide crises, resolution measures have been more successful in financial restructuring than in restoring banks' ongoing profitability or credit to the private sector. In most cases bank lending has remained subdued for years after a banking crisis.

Suggested Citation

  • Glenn Hoggarth & Jack Reidhill & Peter Sinclair, 2004. "On the resolution of banking crises: theory and evidence," Bank of England working papers 229, Bank of England.
  • Handle: RePEc:boe:boeewp:229
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    File URL: http://www.bankofengland.co.uk/research/Documents/workingpapers/2004/WP229.pdf
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    References listed on IDEAS

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    Cited by:

    1. Acharya, Viral V. & Yorulmazer, Tanju, 2007. "Too many to fail--An analysis of time-inconsistency in bank closure policies," Journal of Financial Intermediation, Elsevier, vol. 16(1), pages 1-31, January.
    2. Viral V. Acharya & Tanju Yorulmazer, 2008. "Cash-in-the-Market Pricing and Optimal Resolution of Bank Failures," Review of Financial Studies, Society for Financial Studies, vol. 21(6), pages 2705-2742, November.
    3. Li, Hui & Liu, Hong & Siganos, Antonios & Zhou, Mingming, 2016. "Bank regulation, financial crisis, and the announcement effects of seasoned equity offerings of US commercial banks," Journal of Financial Stability, Elsevier, vol. 25(C), pages 37-46.
    4. David G. Mayes, 2004. "An approach to bank insolvency in transition and emerging economies," Finance 0404015, EconWPA.
    5. Marc Dobler & Simon T Gray & Diarmuid Murphy & Bozena Radzewicz-Bak, 2016. "The Lender of Last Resort Function after the Global Financial Crisis," IMF Working Papers 16/10, International Monetary Fund.
    6. Acharya, Viral V & Yorulmazer, Tanju, 2005. "Cash-in-the-Market Pricing and Optimal Bank Bailout Policy," CEPR Discussion Papers 5154, C.E.P.R. Discussion Papers.
    7. Aldean, Cory, 2010. "Financial crisis response plan," MPRA Paper 28166, University Library of Munich, Germany, revised 27 Jan 2011.
    8. Bolzico, Javier & Mascaro, Yira & Granata, Paola, 2007. "Practical guidelines for effective bank resolution," Policy Research Working Paper Series 4389, The World Bank.
    9. Misa Tanaka & Glenn Hoggarth, 2006. "Resolving banking crises - an analysis of policy options," Bank of England working papers 293, Bank of England.
    10. Greg Caldwell, 2005. "An Analysis of Closure Policy under Alternative Regulatory Structures," Staff Working Papers 05-11, Bank of Canada.
    11. Zafer Kanık, 2017. "Rescuing the Financial System: Capabilities, Incentives, and Optimal Interbank Networks," Working Papers 17-17, NET Institute.
    12. Imola Drigă & Codruța Dura & Ilie Răscolean, 2011. "Overview of the Caampl Early Warning System in Romanian Banking," Annals of the University of Petrosani, Economics, University of Petrosani, Romania, vol. 11(2), pages 71-80.
    13. Grégory Nguyen & Peter Praet, 2006. "Cross-border crisis management : a race against the clock or a hurdle race ?," Financial Stability Review, National Bank of Belgium, vol. 4(1), pages 151-173, June.
    14. Anastasiou, Dimitrios, 2016. "Management and Resolution methods of Non-performing loans: A Review of the Literature," MPRA Paper 77581, University Library of Munich, Germany, revised 2017.
    15. Bojan Markovic, 2006. "Bank capital channels in the monetary transmission mechanism," Bank of England working papers 313, Bank of England.

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