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
Date Written: October 28, 2013
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.
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