Responding to Banking Crises: Lessons From Cross-Country Evidence
January 1, 2010
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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.
Subject: Banking, Banking crises, Crisis management, Crisis resolution, Financial crises, Fiscal policy
Keywords: bank rescue policy, bank support policy, bank-support policy, Banking crises, banking crisis cost, banking crisis policies, blanket government guarantee, countercyclical policy tool, Crisis management, crisis performance, Crisis resolution, crisis resolution policy, crisis response policy, Global, output growth, Policy index, policy measure, Policy response, Policy response index, resolution policy, response index, WP
Pages:
33
Volume:
2010
DOI:
Issue:
018
Series:
Working Paper No. 2010/018
Stock No:
WPIEA2010018
ISBN:
9781451962239
ISSN:
1018-5941
