How to fight a banking crisis

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The world has undergone enough banking crises that some useful lessons might be gleaned from past experience. A working paper from the IMF attempts to do just that with a database of all systemic banking crises between 1970 and 2007 - a total of 42. Systemic Banking Crises: A New Database offers up a few guidelines on what to do when faced with a crisis:

Our preliminary analysis based on partial correlations indicates that some resolution measures are more effective than others in restoring the banking system to health and containing the fallout on the real economy. Above all, speed appears of the essence. As soon as a large part of the financial system is deemed insolvent and has reached systemic crisis proportions, bank losses should be recognized, the scale of the problem should be established, and steps should be taken to ensure that financial institutions are adequately capitalized.

Perhaps just as important is what has not worked well during a crisis:

Government-owned asset management companies appear largely ineffective in resolving distressed assets, largely due to political and legal constraints.

Instead of governments managing assets, the IMF study suggests a different approach:

To relief [sic] indebted corporates and households from financial stress and restore their balance sheets to health, intervention in the form of targeted debt relief programs to distressed borrowers and corporate restructuring programs appear most successful.

Update: An electronic version of the database is available on Luc Laeven's website.


Ryan Hahn

Operations Officer

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