Banking system failures in developing and transition countries: Diagnosis and predictions (original) (raw)
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WP/18/206 Systemic Banking Crises Revisited
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A User’s Guide to Banking Crises
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...
Resolution of Banking Crises: The Good, the Bad, and the Ugly
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.
Resolving Systemic Financial Crises: Policies and Institutions
Policy Research Working Papers, 2004
We analyze the role of institutions in resolving systemic banking crises for a broad sample of countries. Banking crises are fiscally costly, especially when policies like substantial liquidity support, explicit government guarantees on financial institutions' liabilities, and forbearance from prudential regulations are used. Higher fiscal outlays do not, however, accelerate the recovery from a crisis. Better institutions-less corruption, improved law and order, legal system, and bureaucracy-do. We find these results to be relatively robust to estimation techniques, including controlling for the effects of a poor institutional environment on the likelihood of financial crisis and the size of fiscal costs.
This paper reviews the literature on financial crises focusing on three specific aspects. First, what are the main factors explaining financial crises? Since many theories on the sources of financial crises highlight the importance of sharp fluctuations in asset and credit markets, the paper briefly reviews theoretical and empirical studies on developments in these markets around financial crises. Second, what are the major types of financial crises? The paper focuses on the main theoretical and empirical explanations of four types of financial crises-currency crises, sudden stops, debt crises, and banking crises-and presents a survey of the literature that attempts to identify these episodes. Third, what are the real and financial sector implications of crises? The paper briefly reviews the shortand medium-run implications of crises for the real economy and financial sector. It concludes with a summary of the main lessons from the literature and future research directions.
Managing the Real and Fiscal Effects of Banking Crises
World Bank Discussion Papers, 2002
Foreword I n recent decades many countries have experienced systemic banking crises requiring major restructurings of their financial systems. These restructurings have often had high fiscal costs, with budget outlays sometimes exceeding 50 percent of GDP. The recent East Asian crisis spurred a debate on policies needed to restore financial stability and avert and mitigate future financial crises. Managing and resolving a financial crisis is a complex undertaking-and one that raises important questions about government's role. To advance the dialogue on these issues, World Bank Group staff have prepared a number of papers, three of which are presented in this volume. These papers are not intended to reflect the Bank Group's policies, but rather to stimulate debate in and solicit views from the development community at large. While the papers in this volume were motivated by events that took place during the East Asian crisis, they also draw on experiences from other regions. Although many questions remain to be answered, this volume contributes to the literature by providing an overview of the lessons learned from past government policies aimed at managing and resolving financial crises. The volume will be of particular interest to policymakers involved with financial and corporate sector reform.
IMF Working Papers, 2008
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 uses a Binary Classification Tree (BCT) model to analyze banking crises in 50 emerging market and developing countries during 1990-2005. The BCT identifies key indicators and their threshold values at which vulnerability to banking crisis increases. The three conditions identified as crisis-prone-(i) very high inflation, (ii) highly dollarized bank deposits combined with nominal depreciation or low liquidity, and (iii) low bank profitability-highlight that foreign currency risk, poor financial soundness, and macroeconomic instability are key vulnerabilities triggering banking crises. The main results survive under alternative robustness checks, confirming the importance of the BCT approach for monitoring banking system vulnerabilities.