Managing Financial Crises - IADI · GFC: 12 countries, of which 10 are advanced Earlier crises: 18 countries, of which four are advanced How do policy choices and outcomes differ?
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Managing Financial Crises
Stijn Claessens, Head of Financial Stability Policy & Deputy Head, Monetary and Economic Department
2019 IADI Biennial Research Conference: “Towards Building a More Resilient Financial System –Challenges in Deposit Insurance and Bank Resolution”, 23 May 2019–24 May 2019
Disclaimer: The opinions expressed are those of the author and do not necessarily reflect views of the Bank for International Settlements.
There have been many crises, everywhere and of various types
There have been many crises over centuries More common in emerging markets earlier, but great financial
crisis (GFC) affected predominantly advanced countries Crises come in (regional) waves: Latin America, Asia, US/Europe...
While causes vary by type, they are interrelated Boom (and bust) patterns are common to most Banking, currency and sovereign crises can overlap since one can
lead to the other
But identifying and classifying crises is still an art Samples vary, and so do related studied consequences…
2
Crises are recurrent events. So one can learn from history…
0
20
40
60
80
100
120
140
160
180
1900 1905 1910 1915 1920 1925 1930 1935 1940 1945 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010
Banking, currency, default,
and inflation crises(BCDI index)
BCDI index + stock market
crashPanic of 1907
World War I - hyperinflation
Great Depression
World War II - more defaults
Oil shock-inflation
Emerging market crises and Nordic and Japanese banking crises
Great financial crisis
Com
posi
te
Cris
is
Inde
x
World aggregate (1900–2010): A composite index of banking, currency, sovereign default and, inflation crises, and stock market crashes (weighted by their share of world income)
Source: Reinhart and Rogoff, 20103
Financial crises can have large and long-lasting effects on the real economy
Output Evolution after Banking and Currency Crises (Percent of pre-crisis trend)-1
5-1
0-5
0
-1 0 1 2 3 4 5 6 7
Banking Crises
-15-10
-50
-1 0 1 2 3 4 5 6 7
Currency Crises
Note: Figure reports mean difference from year t = –1; 90-percent confidence interval for estimated mean; first year of crisis at t = 0; years on x-axis.
4
Costliest banking crises since 1970s includes some recent crises
57 55
44 44 44 43 41
32 32 31
Indon
esia
1997
Arge
ntina
19
80Ice
land
2008
Jama
ica
1996
Thail
and
1997 Ch
ile
1981
Irelan
d 20
08Ma
cedo
nia
1993 Tu
rkey
2000
Korea
19
97
Fiscal cost(In percent of GDP)
108 103
88 83 8273 72 68 65 63
Guine
a-Biss
au
1995
Cong
o, R
ep
1992 Ch
ile
1981
Urug
uay
1981
Arge
ntina
20
01 Irelan
d 20
08Ice
land
2008
Indon
esia
1997
Tanz
ania
1987
Nige
ria
1991
Increase in debt(In percent of GDP)
143130
121109 106 106 106 106 102 98
Kuwa
it 19
82Co
ngo,
DR
1991
Burun
di 19
94Th
ailan
d 19
97Jo
rdan
19
89Ire
land
2008
Latvi
a 20
08Ca
mero
on
1987
Leba
non
1990
Ecua
dor
1982
Output loss(In percent of GDP)
Source: Laeven and Valencia (2012)5
Comparing causes provides lessons…As does comparing crises management Approaches vary
What differs every time? Does it matter? What to do for the next crisis?
Compare banking crises for samples of countries GFC: 12 countries, of which 10 are advanced Earlier crises: 18 countries, of which four are advanced
How do policy choices and outcomes differ? All unique, but some commonality in causes GFC was more global
6
Liquidity support much larger in GFC
Note: All dates are relative to the peak of the crisis, with periods referring to quarters before or after onset of crisis. Medians.
0
2
4
6
8
10
12
14
16
18
T-12 T-9 T-6 T-3 T=0 T+3 T+6 T+9 T+12
(%)
Earlier GFC
Liquidity support (In percent of GDP)
77
Monetary and fiscal policy provided more support in GFC than in the earlier crises...
8
00.20.40.60.8
11.21.41.6
T-4 T = 0 T+4 T+8(Quarters)
Median Short Term Interest Rates(Index)
-8
-6
-4
-2
0
2
T-8 T-4 T = 0 T+4 T+8
(%)
(Quarters)
Median Fiscal Balances(% of GDP)
Note: All dates are relative to the peak of the crisis, with periods referring to quartersbefore or after onset of crisis. Medians.
Earlier GFC
The real effects of crises were thus mitigated
Probability of remaining in a recession in a sample of recessions with and without financial crises.
9
Public recapitalisation was seven quarters after guarantees extended in earlier crises
02468
1012141618
T-12 T-9 T-6 T-3 T=0 T+3 T+6 T+9 T+12
(%)
Solid lines: Introduction of recapitalisationprograms
Dashed lines: Introduction of liabilities guarantees
Liquidity support (In percent of GDP)
10
Note: All dates are relative to the peak of the crisis, with periods referring to quarters before or after onset of crisis. Medians.
Earlier GFC
But in GFC, public recapitalisation much sooner (two quarters)
02468
1012141618
T-12 T-9 T-6 T-3 T=0 T+3 T+6 T+9 T+12
(%)
Solid lines: Introduction of recapitalisationprograms
Dashed lines: Introduction of liabilities guarantees
Earlier GFC
Liquidity support (In percent of GDP)
11
Note: All dates are relative to the peak of the crisis, with periods referring to quarters before or after onset of crisis. Medians.
And while private markets contributed more, thus lower initial fiscal costs, in GFCs public debt (countercyclical fiscal) and global costs (more severe crisis) were higher
12
Cost of Past and Recent Crises(Medians, in percent of GDP)
0
10
20
30
40
50
Direct Fiscal Costs Increase in PublicDebt
Output Losses World Output Loss
(%)
Earlier GFC
Restructuring in GFC vs past were qualitatively similar, except for guarantees, DI and AMCs
13
0%
20%
40%
60%
80%
100%Bank Holidays
Deposit Freezes
Increase in depositinsurance
Significantadditional
guarantees
All liabilitiesguaranteed
Asset guarantees
Asset Purchases
Nationalizations
BankRecapitalization with
Public Funds
Asset ManagementCompanies
Earlier GFC
Resolution is key. Less differentiation, less ‘conditionality’ ⇒ less deep restructuring Viability assessments limited ex-ante (too little time)
Stress tests ex-post, and of varying quality
Conditions for assistance limited
More/easier support to potentially non-viable institutions
(“open bank assistance”), little resolution feasible
‘Traditional’ restructuring tools much less used
Limited asset restructuring, eg mortgages
More reliant on flow measures and monetary policy 14
Lessons for deposit insurance in crises
Deposit insurance serves multiple goals for a single bank Prevent runs Protect depositors Ease resolution
Deposit insurance important too in systemic crises Prevent system-wide runs Help protect depositors as well as other creditors
- Eg leverage guarantees provision Ease resolution overall
- Build on experience
Lessons on deposit insurance in systemic crises More still to be learned, especially on resolution
15
Edited by: Stijn Claessens, M Ayhan Kose, Luc Laeven and Fabián Valencia
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