The Use of Blanket Guarantees in Banking Crises

45 Pages Posted: 18 Dec 2008

See all articles by Luc Laeven

Luc Laeven

European Central Bank (ECB); Centre for Economic Policy Research (CEPR)

Fabián Valencia

International Monetary Fund (IMF)

Date Written: October 2008

Abstract

In episodes of significant banking distress or perceived systemic risk to the financial system, policymakers have often opted for issuing blanket guarantees on bank liabilities to stop or avoid widespread bank runs. In theory, blanket guarantees can prevent bank runs if they are credible. However, guarantee could add substantial fiscal costs to bank restructuring programs and may increase moral hazard going forward. Using a sample of 42 episodes of banking crises, this paper finds that blanket guarantees are successful in reducing liquidity pressures on banks arising from deposit withdrawals. However, banks' foreign liabilities appear virtually irresponsive to blanket guarantees. Furthermore, guarantees tend to be fiscally costly, though this positive association arises in large part because guarantees tend to be employed in conjunction with extensive liquidity support and when crises are severe.

Keywords: Banking crisis, Loan guarantees, Risk management, Liquidity, Bank credit, Financial systems, Moral hazard

Suggested Citation

Laeven, Luc A. and Valencia, Fabian V., The Use of Blanket Guarantees in Banking Crises (October 2008). IMF Working Papers, Vol. , pp. 1-43, 2008. Available at SSRN: https://ssrn.com/abstract=1316718

Luc A. Laeven (Contact Author)

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Fabian V. Valencia

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

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