From Systemic Banking Crises to Fiscal Costs: Risk Factors

IMF Working Papers, July 20, 2015

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This paper examines the risk factors associated with fiscal costs of systemic banking crises using cross-country data.
The analysis differentiates between immediate direct fiscal costs of government intervention (e.g., recapitalization and asset purchases) and overall fiscal costs of banking crises as proxied by changes in the public debt-to-GDP ratio.
The paper identifies that immediate costly interventions can be cost-effective over time: "costly short-term interventions are not necessarily associated with larger increases in public debt, supporting the thesis that immediate intervention may be actually cost-effective over time."

Both direct and overall fiscal costs of banking crises are high when countries enter the crisis with:
- large banking sectors that rely on external funding,
- leveraged non-financial private sectors,
- use of guarantees on bank liabilities during the crisis.
Factors that help alleviate direct fiscal costs:
- better quality of banking supervision,
- higher coverage of deposit insurance.

There is a possible policy trade-off between short-term intervention costs and long-term public debt outcomes:
- Costly short-term interventions are not necessarily associated with larger increases in public debt.
- Immediate interventions may be cost-effective when evaluated over time, suggesting that avoiding early intervention to reduce immediate fiscal outlays could lead to larger overall fiscal costs.

Subject: Banking crises, Commercial banks, Financial crises, Financial institutions, Public debt, Systemic crises
Keywords: Banking crises, banking crisis, banking sector characteristic, Commercial banks, contingent liabilities, cost, cost recovery, direct cost, financial crisis, fiscal cost, fiscal costs, Global, resolution cost, standard deviation, Systemic crises, WP