## The Use of Blanket Guarantees in Banking Crises

_IMF Working Papers, October 1, 2008_

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## Bibliographic details
- Authors: Luc Laeven, Fabian Valencia
- Published: October 1, 2008
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781451871081.001

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### Overview and Research Question
- Authors: Luc Laeven, Fabian Valencia
- Publication date: October 1, 2008
- Series: Working Paper No. 2008/250
- Issue: 250
- Volume: 2008
- Pages: 43
- DOI: https://doi.org/10.5089/9781451871081.001
- ISBN: 9781451871081
- ISSN: 1018-5941
- Sample: 42 episodes of banking crises
- Subject / Keywords: Bank resolution, Banking, Blanket guarantee, Foreign liabilities, Liquidity; bank, guarantee, liquidity support, WP

### Key findings
- Blanket guarantees are successful in reducing liquidity pressures on banks arising from deposit withdrawals.
- Banks' foreign liabilities appear virtually irresponsive to blanket guarantees.
- Guarantees tend to be fiscally costly.
- The positive association between guarantees and fiscal cost arises in large part because:
  - guarantees tend to be employed in conjunction with extensive liquidity support, and
  - guarantees are used when crises are severe.

### Analysis and interpretation
- Theoretical premise:
  - Blanket guarantees can prevent bank runs if they are credible.
  - However, guarantees may increase moral hazard going forward.
- Empirical evidence (sample-based):
  - Effectiveness shown for domestic deposit withdrawal pressures.
  - No measurable responsiveness observed for foreign liabilities.

### Policy implications and considerations
- Use blanket guarantees to reduce immediate liquidity pressures from deposit withdrawals when credibility can be established.
- Recognize that blanket guarantees may not affect foreign liabilities and therefore may not stem cross-border funding runs.
- Anticipate substantial fiscal costs associated with guarantees, particularly when combined with extensive liquidity support or deployed in severe crises.
- Factor in potential moral hazard effects when designing guarantee schemes and accompanying regulatory measures.

*Source: The Use of Blanket Guarantees in Banking Crises, Luc Laeven and Fabian Valencia, IMF Working Papers No. 2008/250, October 1, 2008 (43 pages).*

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