Responding to Banking Crises: Lessons from Cross-Country Evidence

33 Pages Posted: 1 Feb 2010

See all articles by Enrica Detragiache

Enrica Detragiache

International Monetary Fund (IMF) - European Department

Giang Ho

International Monetary Fund (IMF)

Date Written: Janurary 2010

Abstract

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.

Keywords: Bank restructuring, Banking crisis, Banking sector, Cross country analysis, Economic growth, Economic models, Economic recovery, Fiscal policy, Governance, Government expenditures, Public finance, Stabilization measures

Suggested Citation

Detragiache, Enrica and Ho, Giang, Responding to Banking Crises: Lessons from Cross-Country Evidence (Janurary 2010). IMF Working Papers, Vol. , pp. 1-32, 2010. Available at SSRN: https://ssrn.com/abstract=1544712

Enrica Detragiache

International Monetary Fund (IMF) - European Department ( email )

700 19th Street NW
Washington, DC 20431
United States

Giang Ho

International Monetary Fund (IMF)

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

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