Controlling the fiscal cost of banking crises

this is an extract taken from Patrick Honohan and Daniela Klingebiels paper on banking crises which was written in 2000, its evidence is based upon the study of c. 40 banking crises throughout the world in both developed and developing economies.

Banking crises hit the budget with outlays that must be absorbed by higher taxes or spending cuts, and they are also costly in terms of forgone economic output (eg: every € invested in a bailout doesn’t go into creating a factory or school or something with a similar societal benefit). Certain crisis management strategies appear to add greatly to fiscal costs

such as:

unlimited deposit guarantees open ended liquidity support repeated recapitalizations debtor bailouts regulatory forbearance

Ireland is currently engaging in several of these even though their findings favoured a strict rather than accommodating approach to crisis resolution. In fact, an austere solution will (according to the paper) mean that the cost is limited to 1% of GDP, little more than 1/10th of what was actually …

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