Financial Restructuring in Banking and Corporate Sector Crises: What Policies to Pursue?

Abstract

We review the literature on resolving bank and corporate sector crises to identify government policies that affect the depth of a crisis and the ease and sustainability of recovery, and to analyze their fiscal cost. A consistent framework - including sufficient resources for loss-absorption and private agents facing the right framework of sticks and carrots - is the, although often missing key to successful bank and corporate restructuring. Sustainability of restructuring calls for deeper structural reforms, which often requires dealing with political economy factors up-front. Using data for 687 corporations from eight crisis countries, we find empirically that a package of specific resolution measures can help accelerate the recovery from a crisis. These policies, however, come with significant fiscal costs.