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Capital movements

Systemic banking crises: a new database

Learning from past banking crises - which policy responses work?

Authors: L. Laeven; F. Valencia
Publisher: IMF Publications, 2008

Full text of document

A new dataset from the IMF on banking crises has been compiled. It claims to be the most complete and detailed on banking crises to date. The information covers the timing of systemic crises between 1970 and 2007. It describes, in detail, policy responses both to resolve and contain the 42 episodes that have occurred in this time. This paper describes the new dataset with detailed information on policy responses employed in different countries.

The report emphasises policy responses that restore the banking system to health. It is important to recognise that reallocation of wealth towards banks and debtors, and away from taxpayers, is a key trade-off. This can restart productive investment but at large cost. Costs include tax payers wealth and indirect costs come from distortions in the market.

Policy suggestions include:

  • fiscal tightening may be needed when unsustainable fiscal policies are the trigger, rather than expansionary fiscal policies which are often used to attack crises
  • tight monetary policy could help contain financial market pressures
  • when a crisis is characterised by liquidity and solvency problems the central bank should be ready to provide support to illiquid banks
  • when bank runs are a risk, depositor protection may be needed in addition to liquidity support although this can be costly and does not necessarily speed up economic recovery
Statistical analysis of the dataset reveals elements of successful resolution and recapitalisation when financial institutions:
  • act quickly
  • are selective in financial assistance to banks
  • specify clear quantifiable rules that limit access to preferred stock assistance
  • enact capital regulation that establishes meaningful standards for risk-based capital
Further analysis suggests:
  • government-owned asset management companies appear largely ineffective in resolving distressed assets
  • the adverse impact of the stress on the real economy needs to be contained
  • targeted debt relief to distressed borrowers to relieve households of financial stress
  • corporate restructuring to help indebted corporations