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The fiscal costs of systemic banking crises
Author(s) -
Amaglobeli David,
End Nicolas,
Jarmuzek Mariusz,
Palomba Geremia
Publication year - 2017
Publication title -
international finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.458
H-Index - 39
eISSN - 1468-2362
pISSN - 1367-0271
DOI - 10.1111/infi.12100
Subject(s) - economics , debt , financial system , financial crisis , government (linguistics) , economic interventionism , fiscal policy , monetary economics , government debt , economic policy , business , finance , macroeconomics , linguistics , philosophy , politics , political science , law
This paper examines fiscal costs of systemic banking crises. It uses a dataset of 65 crisis episodes since 1980 and considers both the direct budgetary cost of government intervention and the overall fiscal impact as proxied by changes in the public debt‐to‐GDP ratio. We find that both direct and overall fiscal impacts of banking crises are high when countries enter the crisis with large banking sectors, rely on excessive external funding, have highly leveraged non‐financial private sectors, and resort to using government guarantees on bank liabilities during the crisis. Better quality of banking supervision and higher coverage of deposit insurance help, however, alleviate the direct fiscal costs. We also identify a policy trade‐off: costly short‐term interventions are not necessarily associated with larger increases in public debt, supporting the thesis that immediate intervention may actually be a more cost‐effective solution over the long term.