Bad Banks as a Response to Crises: When Do Governments Use Them, and Why Does Their Governance Differ?

39 Pages Posted: 29 Mar 2013 Last revised: 28 Oct 2013

Christopher Gandrud

City University London - International Political Economy; Hertie School of Governance

Mark Hallerberg

Hertie School of Governance

Date Written: October 28, 2013

Abstract

Many countries have used public asset management companies (AMCs, or “bad banks”) as part of strategies to restore their banking systems after crises. This includes the United States in the late 1980s, countries in East Asia and Latin America in the 1990s, and countries in Europe and Africa more recently. AMC structures, however, vary widely. Using a newly created global dataset of public bad banks, we begin to explore how domestic political institutions, international institutions, and international capital may be behind policymakers’ (a) decisions to create AMCs in response to crises as well as (b) design choices, particularly in terms of AMCs’ level of centralisation. We find evidence that countries with low levels of foreign ownership of the banking system and many highly polarised veto players are more likely to create AMCs. IMF conditionality is also associated with the creation of AMCs. We furthermore find evidence for a more nuanced relationship between democracy and AMC creation than what has been discussed in previous research. Our evidence suggests that countries with high levels of democracy, rather than being less likely to create AMCs at all are actually more likely to create decentralised AMCs.

Suggested Citation

Gandrud, Christopher and Hallerberg, Mark, Bad Banks as a Response to Crises: When Do Governments Use Them, and Why Does Their Governance Differ? (October 28, 2013). Available at SSRN: https://ssrn.com/abstract=2241290 or http://dx.doi.org/10.2139/ssrn.2241290

Christopher Gandrud (Contact Author)

City University London - International Political Economy ( email )

Northampton Square
London, EC1V 0HB
United Kingdom

Hertie School of Governance ( email )

Schlossplatz 1
Berlin, 10178
Germany

Mark Hallerberg

Hertie School of Governance ( email )

Friedrichstr. 180
Berlin, Berlin 10117
Germany

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