Responding to Banking Crises: Lessons From Cross-Country Evidence

Author/Editor:

Enrica Detragiache ; Giang Ho

Publication Date:

January 1, 2010

Electronic Access:

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Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary:

A common legacy of banking crises is a large increase in government debt, as fiscal resources are used to shore up the banking system. Do crisis response strategies that commit more fiscal resources lower the economic costs of crises? Based on evidence from a sample of 40 banking crises we find that the answer is negative. In fact, policies that are riskier for the government budget are associated with worse, not better, post-crisis performance. We also show that parliamentary political systems are more prone to adopt bank rescue measures that are costly for the government budget. We take advantage of this relationship to instrument the policy response, thereby addressing concerns of joint endogeneity. We find no evidence that endogeneity is a source of bias.

Series:

Working Paper No. 2010/018

Subject:

Banking Banking crises Crisis management Crisis resolution Financial crises Fiscal policy

English

Publication Date:

January 1, 2010

ISBN/ISSN:

9781451962239/1018-5941

Stock No:

WPIEA2010018

Pages:

33

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