On the Resolution of Banking Crises: Theory and Evidence

Bank of England Working Paper No. 229

26 Pages Posted: 4 Jan 2005

See all articles by Glenn Hoggarth

Glenn Hoggarth

Bank of England

Jack Reidhill

FDIC, Division of Insurance and Research

Peter J. N. Sinclair

University of Birmingham - Department of Economics

Date Written: September 2004

Abstract

This paper reviews the merits of the various techniques used by authorities when resolving individual or widespread bank failures in developed and emerging market economies. In particular, the various banking crisis resolution techniques available to the authorities are classified and then compared with the techniques that have been used in practice, drawing on both the available evidence and our own analysis. With individual bank failures the authorities usually first seek a private sector solution. Any losses are passed on to existing shareholders, managers and sometimes uninsured creditors, and not to taxpayers. But policy options are more limited in systemwide crises. In most recent systemwide crises, early on central banks have provided liquidity to failing banks and governments have given blanket guarantees to depositors. In nearly all cases, investor panics have been quelled but at a cost to the budget and increasing the risk of future moral hazard. Open-ended central bank liquidity support seems to have prolonged crises, thus increasing rather than reducing the output costs to the economy. Bank restructuring has usually occurred through mergers, often government assisted, and some government capital injection or increase in control. Bank liquidations have been rare and creditors - including uninsured ones - have rarely made losses. In systemwide crises, resolution measures have been more successful in financial restructuring than in restoring banks' ongoing profitability or credit to the private sector. In most cases bank lending has remained subdued for years after a banking crisis.

Suggested Citation

Hoggarth, Glenn and Reidhill, Jack and Sinclair, Peter J. N., On the Resolution of Banking Crises: Theory and Evidence (September 2004). Bank of England Working Paper No. 229. Available at SSRN: https://ssrn.com/abstract=641287 or http://dx.doi.org/10.2139/ssrn.641287

Glenn Hoggarth (Contact Author)

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

Jack Reidhill

FDIC, Division of Insurance and Research ( email )

Washington, DC 20429
United States

Peter J. N. Sinclair

University of Birmingham - Department of Economics ( email )

Economics Department
Birmingham, B15 2TT
United Kingdom

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