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Policies For Banking Crises: A Theoretical Framework

  • Rafael Repullo


    (CEMFI, Centro de Estudios Monetarios y Financieros)

This paper analyzes the effects on ex ante risk-shifting incentives and ex post fiscal costs of three policies that are frequently used in dealing with banking crises, namely, forbearance from prudential regulations, extension of blanket deposit guarantees, and provision of unrestricted liquidity support. In the context of a simple model of information-based bank runs, where banks are funded with both insured and uninsured deposits, the paper shows that the expectation of implementation of any of these policies leads to a reduction in the interest rate of uninsured deposits and in the banks incentives to take risk, but increases the expected fiscal costs of the crises.

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Paper provided by CEMFI in its series Working Papers with number wp2004_0418.

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Date of creation: Sep 2004
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Handle: RePEc:cmf:wpaper:wp2004_0418
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  1. Demirguc-Kunt, Asli & Huizinga, Harry, 2004. "Market discipline and deposit insurance," Journal of Monetary Economics, Elsevier, vol. 51(2), pages 375-399, March.
  2. Andrea Prat, 2002. "The Wrong Kind of Transparency," STICERD - Theoretical Economics Paper Series 439, Suntory and Toyota International Centres for Economics and Related Disciplines, LSE.
  3. Kahn, Charles M. & Santos, Joao A.C., 2005. "Allocating bank regulatory powers: Lender of last resort, deposit insurance and supervision," European Economic Review, Elsevier, vol. 49(8), pages 2107-2136, November.
  4. Demirguc-Kunt, Asl' & Kane, Edward J., 2001. "Depositinsurance around the globe : where does it work?," Policy Research Working Paper Series 2679, The World Bank.
  5. Alonso, Irasema, 1996. "On avoiding bank runs," Journal of Monetary Economics, Elsevier, vol. 37(1), pages 73-87, February.
  6. Rafael Repullo, 2000. "Who should act as lender of last resort? an incomplete contracts model," Proceedings, Federal Reserve Bank of Cleveland, pages 580-610.
  7. Cull, Robert & Senbet, Lemma W. & Sorge, Marco, 2001. "Deposit insurance and financial development," Policy Research Working Paper Series 2682, The World Bank.
  8. Jacklin, Charles J & Bhattacharya, Sudipto, 1988. "Distinguishing Panics and Information-Based Bank Runs: Welfare and Policy Implications," Journal of Political Economy, University of Chicago Press, vol. 96(3), pages 568-92, June.
  9. Diamond, Douglas W & Dybvig, Philip H, 1983. "Bank Runs, Deposit Insurance, and Liquidity," Journal of Political Economy, University of Chicago Press, vol. 91(3), pages 401-19, June.
  10. María Soledad Martínez-Peria & Sergio Schmukler, 2002. "Do Depositors Punish Banks for Bad Behavior? Market Discipline, Deposit Insurance, and Banking Crises," Central Banking, Analysis, and Economic Policies Book Series, in: Leonardo Hernández & Klaus Schmidt-Hebbel & Norman Loayza (Series Editor) & Klaus Schmidt-Hebbel (Se (ed.), Banking, Financial Integration, and International Crises, edition 1, volume 3, chapter 5, pages 143-174 Central Bank of Chile.
  11. Martinez Peria, Maria Soledad & Schmukler, Sergio L., 1999. "Do depositors punish banks for"bad"behavior? : market discipline in Argentina, Chile, and Mexico," Policy Research Working Paper Series 2058, The World Bank.
  12. Claessens,Constantijn A. & Klingebiel, Daniela & Laeven, Luc, 2004. "Resolving systemic financial crisis : policies and institutions," Policy Research Working Paper Series 3377, The World Bank.
  13. Reint Gropp & Jukka Vesala, 2004. "Deposit Insurance, Moral Hazard and Market Monitoring," Review of Finance, European Finance Association, vol. 8(4), pages 571-602.
  14. Honohan, Patrick & Klingebiel, Daniela, 2003. "The fiscal cost implications of an accommodating approach to banking crises," Journal of Banking & Finance, Elsevier, vol. 27(8), pages 1539-1560, August.
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