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Fiscal sustainability in the presence of systemic banks: the case of EU countries

  • Agnès Bénassy-Quéré
  • Guillaume Roussellet

We provide a first attempt to include off-balance sheet, implicit insurance to SIFIs into a consistent assessment of fiscal sustainability, for 27 countries of the European Union. We first calculate tax gaps à la Blanchard (1990) and Blanchard et al. (1990). We then introduce two alternative measures of implicit off-balance sheet liabilities related to the risk of a systemic bank crisis. The first one relies of microeconomic data at the bank level. The second one relies on econometric estimations of the probability and the cost of a systemic banking crisis, based on historical data. The former approach tends to maximize the fiscal cost of systemic banking crises, whereas the latter one tends to minimize it. Hence we believe that the combined use of these two methodologies helps to gauge the range of fiscal risk.

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Paper provided by CEPII research center in its series Working Papers with number 2012-05.

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Date of creation: Mar 2012
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Handle: RePEc:cii:cepidt:2012-05
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  1. Luc Laeven & Fabian Valencia, 2010. "Resolution of Banking Crises; The Good, the Bad, and the Ugly," IMF Working Papers 10/146, International Monetary Fund.
  2. Daniel C. Hardy & Ceyla Pazarbasioglu, 1999. "Determinants and Leading Indicators of Banking Crises: Further Evidence," IMF Staff Papers, Palgrave Macmillan, vol. 46(3), pages 1.
  3. Alberto F. Alesina & Silvia Ardagna, 2012. "The design of fiscal adjustments," NBER Working Papers 18423, National Bureau of Economic Research, Inc.
  4. Hana Polackova, 1998. "Contingent Liabilities : A Threat to Fiscal Stability," World Bank Other Operational Studies 11522, The World Bank.
  5. repec:fip:fedhpr:y:2010:i:may:p:65-71 is not listed on IDEAS
  6. Aliona Cebotari, 2008. "Contingent Liabilities; Issues and Practice," IMF Working Papers 08/245, International Monetary Fund.
  7. Viral V. Acharya & Itamar Drechsler & Philipp Schnabl, 2011. "A Pyrrhic Victory? - Bank Bailouts and Sovereign Credit Risk," NBER Working Papers 17136, National Bureau of Economic Research, Inc.
  8. Asli Demirgüç-Kunt & Enrica Detragiache, 2005. "Cross-Country Empirical Studies of Systemic Bank Distress: A Survey," National Institute Economic Review, National Institute of Economic and Social Research, vol. 192(1), pages 68-83, April.
  9. Asli Demirgüç-Kunt & Enrica Detragiache, 1997. "The Determinants of Banking Crises; Evidence From Developing and Developed Countries," IMF Working Papers 97/106, International Monetary Fund.
  10. Carmen M. Reinhart & Kenneth S. Rogoff, 2011. "From Financial Crash to Debt Crisis," American Economic Review, American Economic Association, vol. 101(5), pages 1676-1706, August.
  11. Polackova, Hana, 1998. "Contingent government liabilities : a hidden risk for fiscal stability," Policy Research Working Paper Series 1989, The World Bank.
  12. Olivier Jean Blanchard, 1990. "Suggestions for a New Set of Fiscal Indicators," OECD Economics Department Working Papers 79, OECD Publishing.
  13. Caprio, Gerard & D’Apice, Vincenzo & Ferri, Giovanni & Puopolo, Giovanni Walter, 2014. "Macro-financial determinants of the great financial crisis: Implications for financial regulation," Journal of Banking & Finance, Elsevier, vol. 44(C), pages 114-129.
  14. Viral V. Acharya & Lasse H. Pedersen & Thomas Philippon & Matthew Richardson, 2010. "Measuring systemic risk," Working Paper 1002, Federal Reserve Bank of Cleveland.
  15. Demirguc-Kunt, Asli & Detragiache, Enrica, 1997. "The determinants of banking crises : evidence from industrial and developing countries," Policy Research Working Paper Series 1828, The World Bank.
  16. Hamilton, James D & Flavin, Marjorie A, 1986. "On the Limitations of Government Borrowing: A Framework for EmpiricalTesting," American Economic Review, American Economic Association, vol. 76(4), pages 808-19, September.
  17. Merton, Robert C., 1977. "An analytic derivation of the cost of deposit insurance and loan guarantees An application of modern option pricing theory," Journal of Banking & Finance, Elsevier, vol. 1(1), pages 3-11, June.
  18. Bohn, Henning, 1995. "The Sustainability of Budget Deficits in a Stochastic Economy," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 27(1), pages 257-71, February.
  19. Fabian Valencia & Luc Laeven, 2008. "Systemic Banking Crises; A New Database," IMF Working Papers 08/224, International Monetary Fund.
  20. repec:cup:cbooks:9780521851855 is not listed on IDEAS
  21. Marc Quintyn & David S. Hoelscher, 2003. "Managing Systemic Banking Crises," IMF Occasional Papers 224, International Monetary Fund.
  22. Viral V. Acharya, 2010. "Measuring systemic risk," Proceedings 1140, Federal Reserve Bank of Chicago.
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