Controlling the Fiscal Costs of Banking Crises
In recent decades, a majority of countries have experienced a systemic banking crisis requiring a major-and expensive-overhaul of their banking system. Not only do banking crises hit the budget with outlays that must be absorbed by higher taxes (or...
| Main Authors: | , |
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| Format: | Policy Research Working Paper |
| Language: | English en_US |
| Published: |
World Bank, Washington, DC
2014
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| Subjects: | |
| Online Access: | http://documents.worldbank.org/curated/en/2000/09/692995/controlling-fiscal-costs-banking-crises http://hdl.handle.net/10986/19787 |
| Summary: | In recent decades, a majority of
countries have experienced a systemic banking crisis
requiring a major-and expensive-overhaul of their banking
system. Not only do banking crises hit the budget with
outlays that must be absorbed by higher taxes (or spending
cuts), but they are costly in terms of forgone economic
output. Many different policy recommendations have been made
for limiting the cost of crises, but there has been little
systematic effort to see which recommendations work in
practice. The authors try to quantify the extent to which
fiscal outlays incurred in resolving banking distress can be
attributed to crisis management measures of a particular
kind adopted by the government in the early years of the
crisis. They find evidence that certain crisis management
strategies appear to add greatly to fiscal costs: unlimited
deposit guarantees, open-ended liquidity support, repeated
recapitalization, debtor bail-outs, and regulatory
forbearance. Their findings clearly tilt the balance in
favor of a strict rather than an accommodating approach to
crisis resolution. At the very least, regulatory authorities
who choose an accommodating or gradualist approach to an
emerging crisis must be sure they have some other way to
control risk-taking. |
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