Banking crisis solutions old and new

2009

The on-going financial crisis results not from a cyclical or managerial failure, but from a structural one: more than 96 other major banking crises occurred over the past 20 years, and these crashes have happened under very different regulatory systems and at different stages of economic development. So far, conventional solutions are being applied—nationalization of the problem assets (as in the original Paulson bailout) or nationalization of the banks (as in Europe). These solutions only deal with the symptoms and not the systemic cause of today’s banking crisis. Similarly, the financial re-regulation that will be on everybody’s political agenda will, at best, reduce the frequency of such crises, but not avoid their re-occurrence. Better solutions are urgently needed because the last breakdown of this magnitude, the Great Depression of the 1930s, ended up in a wave of fascism and World War II.

Journal of Banking & Finance, 2002

The papers in this special issue were presented at a conference on Banks and Systemic Risk held at the Bank of England from 23-25 May 2001. 1 The papers covered three broad areas-banks and systemic risk; theory and evidence of market discipline and signals of bank fragility; and capital requirements and crisis prevention. The view that weakness in the banking sector may have serious systemic effects on the economy more generally hinges on several issues. Since the early 19th century (Thornton, 1802), it has been recognised that problems in one bank can spill over into more widespread difficulties in the sector. The nature of the contracts banks hold (short-term deposits and longer-term loans) exposes them to the possibility of runs; and linkages between banks combined with information asymmetries between counterparties and banks make them vulnerable to contagion. A number of papers have focussed on bank runs (e.g. Diamond and Dybvig, 1983) and the transmission mechanism of problems from one bank to others (e.g. Freixas et al., 2000). Other papers (e.g. Bernanke, 1983) have focussed on the wider costs to the economy if banks fail. This reflects the central position of banks in the payments system and their special role in intermediating flows of funds to small firms and the retail sector. One issue addressed at the conference was whether banking crises do in fact impose externalities on the system. It has been suggested that, with the growth of substitutes for bank intermediation particularly through the development of securities markets, bank failures may not impose substantial costs on economies. Hoggarth, Reis and Saporta ('Costs of banking system instability: some empirical evidence') review the estimates of fiscal costs incurred in dealing with a banking crisis and also

The on-going financial crisis results not from a cyclical or managerial failure, but from a structural one. Part of the evidence for this assertion is that there have already been more than 96 other major banking crises over the past 20 years, and that such crashes have happened even under very different regulatory systems as well as at different stages of economic development. We urgently need to find better solutions because the last time we faced a breakdown of this scope, the Great Depression of the 1930s, ended up in a wave of fascism, and World War II However, so far the conventional solutions being applied -nationalization of the problem assets (as in the original Paulson bailout) or nationalization of the banks (as in Europe) -only deal with the symptoms, not the systemic cause of today's banking crisis. Similarly, the financial reregulation that will be on everybody's political agenda will, at best, reduce the frequency of such crises, but not avoid their re-occurrence.

The last 25 years have seen the resurgence of a problem of long historical standing: banking crises. While the general presence of a “banking system safety net†has typically prevented these modern crises from turning into the kinds of banking panics observed historically, they are nonetheless events of great significance. Caprio and Klingebiel (1997) identify 86 separate episodes of large scale bank insolvency or worse that have occurred since 1974. And, many of these episodes are of staggering enormity. For example, in the early 1980s, Argentina and Chile spent amounts equaling 55% and 42% of their GDP, respectively, on banking system bailouts. And, current estimates are that, in Thailand today, 60-70% of all loans are non-performing.1 The frequency and severity of these crises makes it essential to pose four questions: what causes banking crises?; what can be done to prevent them or, at least, to mitigate their severity?; what are the macroeconomic consequences of banking cris...

IMF Working Papers, 2010

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. This paper presents a new database of systemic banking crises for the period 1970-2009. While there are many commonalities between recent and past crises, both in terms of underlying causes and policy responses, there are some important differences in terms of the scale and scope of interventions. Direct fiscal costs to support the financial sector were smaller this time as a consequence of swift policy action and significant indirect support from expansionary monetary and fiscal policy, the widespread use of guarantees on liabilities, and direct purchases of assets. While these policies have reduced the real impact of the current crisis, they have increased the burden of public debt and the size of government contingent liabilities, raising concerns about fiscal sustainability in some countries.

This commentary was also published on VoxEU, 6 June 2012 (http://www.voxeu.org/index.php?q=node/8069). CEPS Commentaries offer concise, policy-oriented insights into topical issues in European affairs. The views expressed are attributable only to the authors in a personal capacity and not to any institution with which they are associated.

2009

Abstract: The current financial crisis has sparked intense debate about how weak banks should be resolved. Despite international efforts to coordinate and converge on such policies, national policy advice and resolution practices differ. The resolution methods ...

Journal of Banking Regulation, 2008

2010

A variety of factors led or contributed to the current financial crisis, including loose monetary policy; excessive financial market liquidity, leverage and maturity mismatch; weak risk management and underwriting standards; and poor incentives and regulatory gaps in some important segments of the financial system. These weaknesses were amplified by certain pro-cyclical dynamics in regulatory, accounting and risk management frameworks. The banking sector was at the centre of the crisis as the market stress led to an acute re-concentration of on- and off-balance sheet risks in banks, putting pressure on capital buffers, liquidity and credit availability. The weaknesses in the banking sector amplified the transmission of shocks from the financial sector to the real economy. In this paper we want to study the impact of financial crisis on a sample of banks (five banks from USA - JPMorgan Chase & Co, Citigroup, Wells Fargo & Company, US Bancorp, Bank of America Corporation - and five fr...

The Economic History Society Annual Conference University of Wolverhampton (Telford) 27 – 29 March 2015 The 1772-3 British credit crisis has been identified as one of the earliest purely financial crises in which government policy or European war played no significant role. It furthermore displayed an impressive geographical reach encompassing London, Scotland, the Netherlands, and the North American and West Indian colonies, suggesting the presence of contagion and systemic risk in 18th Century finance. A particularly intriguing aspect of the affair concerns the intervention of the Bank of England to prevent the contagious spread of the crisis by a combination of liberal lending to the market and outright bailouts of selected “systemically important” bankers. The evidence presented here supports that, contrary to the modern claims of the “Free Banking” school, the Bank did act as a true Lender of Last Resort (LLR) for the whole of Britain, some thirty years before the first formal articulation of the concept by Henry Thornton. Its breadth of scope and rapidity and efficiency of operation makes it unlikely that its actions were either ad hoc, or mainly politically motivated. Its support of the bills of exchange network in particular did not only provide liquidity to the market, but also preserved an instrument that was used as a monetary surrogate in the prevailing dearth of metal money. Contemporaries finally were equally convinced of the Bank’s unique resources to preserve the financial system from contagion, as well as of its moral obligation to do just that.