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The Use of Blanket Guarantees in Banking Crises

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  • Luc Laeven
  • Fabian Valencia

Abstract

In episodes of significant banking distress or perceived systemic risk to the financial system, policymakers have often opted for issuing blanket guarantees on bank liabilities to stop or avoid widespread bank runs. In theory, blanket guarantees can prevent bank runs if they are credible. However, guarantee could add substantial fiscal costs to bank restructuring programs and may increase moral hazard going forward. Using a sample of 42 episodes of banking crises, this paper finds that blanket guarantees are successful in reducing liquidity pressures on banks arising from deposit withdrawals. However, banks' foreign liabilities appear virtually irresponsive to blanket guarantees. Furthermore, guarantees tend to be fiscally costly, though this positive association arises in large part because guarantees tend to be employed in conjunction with extensive liquidity support and when crises are severe.

Suggested Citation

  • Luc Laeven & Fabian Valencia, 2008. "The Use of Blanket Guarantees in Banking Crises," IMF Working Papers 08/250, International Monetary Fund.
  • Handle: RePEc:imf:imfwpa:08/250
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    References listed on IDEAS

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    More about this item

    Keywords

    Financial systems; Bank credit; Banking crisis; Blanket guarantee; Crisis resolution; Liquidity; Loan guarantees; Moral hazard; Risk management; banking; liquidity support; banking system; deposit insurance; bank restructuring;

    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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