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The Benefits and Costs of Intervening in Banking Crises

Author

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  • Edward J Frydl
  • Marc G Quintyn

Abstract

This paper provides a framework to assess the benefits and costs of intervening in a banking crisis. Intervention involves liquidity support and resolution actions. Principal benefits of intervention include avoiding panic and eliminating the economic costs of distorted incentives. Principal costs include fiscal costs and the economic costs of delay. The government’s main decision concerns the length of the resolution horizon—whether to adopt a deliberate or an aggressive resolution strategy. Dominant factors affecting net benefits are the relative size of the banking system and the loss liquidation rate on assets financed by bank loans.

Suggested Citation

  • Edward J Frydl & Marc G Quintyn, 2000. "The Benefits and Costs of Intervening in Banking Crises," IMF Working Papers 00/147, International Monetary Fund.
  • Handle: RePEc:imf:imfwpa:00/147
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    Cited by:

    1. Sander Oosterloo & Jakob de Haan, 2003. "A Survey of Institutional Frameworks for Financial Stability," DNB Occasional Studies 104, Netherlands Central Bank, Research Department.
    2. Elías Albagli, 2003. "El Embriague Financiero: Una Visión Alternativa de Amplificación Bancaria," Working Papers Central Bank of Chile 207, Central Bank of Chile.
    3. Oosterloo, Sander & de Haan, Jakob, 2004. "Central banks and financial stability: a survey," Journal of Financial Stability, Elsevier, vol. 1(2), pages 257-273, December.
    4. Mayes, David G., 2004. "Who pays for bank insolvency?," Journal of International Money and Finance, Elsevier, vol. 23(3), pages 515-551, April.

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