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The Use of Blanket Guarantees in Banking Crises

Author/Editor: Laeven, Luc | Valencia, Fabian
Authorized for Distribution: October 1, 2008
Electronic Access: Free Full Text (PDF file size is 812KB)
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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: 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.
 
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Series: Working Paper No. 08/250
Subject(s): Banking crisis | Loan guarantees | Risk management | Liquidity | Bank credit | Financial systems | Moral hazard
Author's keyword(s): banking crisis | crisis resolution | blanket guarantee | moral hazard
 
English  
    Published:   October 1, 2008        
            Format:   Paper
    Stock No:   WPIEA2008250   Pages:   43
    Price:   US$18.00 (Academic Rate: US$18.00 )
       
     
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