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The use of blanket guarantees in banking crises

Author: Luc Laeven; Fabian Valencia; International Monetary Fund. Research Department.
Publisher: Washington, D.C. : International Monetary Fund, Research Dept., 2008.
Series: IMF working paper, WP08/250.
Edition/Format:   eBook : Document : EnglishView all editions and formats
Summary:
In episodes of significant banking distress or perceived systemic risk to the financial system, policymakers have often opted for issuing blanket guarantees on bank liabilities to stop or avoid widespread bank runs. In theory, blanket guarantees can prevent bank runs if they are credible. However, guarantee could add substantial fiscal costs to bank restructuring programs and may increase moral hazard going forward.  Read more...
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Genre/Form: Electronic books
Additional Physical Format: Print version:
Laeven, Luc.
Use of blanket guarantees in banking crises.
Washington, D.C. : International Monetary Fund, Research Dept., 2008
(OCoLC)272266969
Material Type: Document, Internet resource
Document Type: Internet Resource, Computer File
All Authors / Contributors: Luc Laeven; Fabian Valencia; International Monetary Fund. Research Department.
ISBN: 9781452745039 145274503X
OCLC Number: 891466044
Notes: "October 2008."
Reproduction Notes: Electronic reproduction. [S.l.] : HathiTrust Digital Library, 2011. MiAaHDL
Description: 1 online resource (45 pages.)
Details: Master and use copy. Digital master created according to Benchmark for Faithful Digital Reproductions of Monographs and Serials, Version 1. Digital Library Federation, December 2002.
Contents: Cover Page; Title Page; Copyright Page; Contents; I. Introduction; II. Country Experiences; Table 1. Selected Blanket Guarantee Episodes; Table 2. Selected Bank-Specific Guarantee Announcements; III. Effectiveness of Blanket Guarantees; Figure 1. Effectiveness of Depositors' Guarantees in Selected Countries; A. Empirical Analysis; Table 3. Impact of Blanket Guarantees on Liquidity Support; Table 4. Short-Term and Medium-Term Effects of Guarantees on Liquidity Support; Table 5. Impact of Blanket Guarantees on Foreign Liabilities. Table 6. Short-Term and Medium-Term Effect of Guarantees on Foreign LiabilitiesIV. The Costs of Using Blanket Guarantees; Figure 2. Fiscal Costs and Blanket Guarantees; Table 7. Blanket Guarantee and Extensive Liquidity Support; Figure 3. Crisis Intensity and Blanket Guarantees; Table 8. Blanket Guarantees, Crisis Intensity, and Fiscal Costs; V. Policy Implications; VI. Conclusions; Table A1. Sequence of Events in Selected Crisis Episodes; Table A2. IMF Programs and Bank Restructuring Policies; References; Footnotes.
Series Title: IMF working paper, WP08/250.
Responsibility: prepared by Luc Laeven, Fabian Valencia.

Abstract:

In episodes of significant banking distress or perceived systemic risk to the financial system, policymakers have often opted for issuing blanket guarantees on bank liabilities to stop or avoid widespread bank runs. In theory, blanket guarantees can prevent bank runs if they are credible. However, guarantee could add substantial fiscal costs to bank restructuring programs and may increase moral hazard going forward. Using a sample of 42 episodes of banking crises, this paper finds that blanket guarantees are successful in reducing liquidity pressures on banks arising from deposit withdrawals. However, banks' foreign liabilities appear virtually irresponsive to blanket guarantees. Furthermore, guarantees tend to be fiscally costly, though this positive association arises in large part because guarantees tend to be employed in conjunction with extensive liquidity support and when crises are severe.

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