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WP/10/146

Resolution of Banking Crises:
The Good, the Bad, and the Ugly
Luc Laeven and Fabian Valencia

© 2010 International Monetary Fund

WP/10/146

IMF Working Paper
Research Department
Resolution of Banking Crises: The Good, the Bad, and the Ugly
Prepared by Luc Laeven and Fabian Valencia1
Authorized for distribution by Stijn Claessens
June 2010
Abstract
This Working Paper should not be reported as representing the views of the IMF
...
Working Papers describe research in progress by the author(s) and are
published to elicit comments and to further debate
...

While there are many commonalities between recent and past crises, both in terms of
underlying causes and policy responses, there are some important differences in terms of the
scale and scope of interventions
...
While these policies have reduced the real impact of the current
crisis, they have increased the burden of public debt and the size of government contingent
liabilities, raising concerns about fiscal sustainability in some countries
...
org; fvalencia@imf
...
The authors thank Eugenio Cerutti, Stijn Claessens, Luis Cortavarria-Checkley, Peter Dohlman,
Mark Griffiths, Aditya Narain, David Parker, Noel Sacasa, and Johannes Wiegand, for comments and/or
discussions, and Jeanne Verrier for outstanding research assistance
...
Introduction
...
The 2007-2009 Global Crisis: A Synopsis
...
Which Countries Had a Systemic Banking Crisis in 2007-2009?
...
Policy Responses in the 2007-2009 Crises: What Is New?
...
How Costly Are the 2007-2009 Systemic Banking Crises?
...
Concluding Remarks
...
U
...
Bank Failures: Past and Present
...
Systemic Banking Crises, 2007-2009……
...
Banking Crisis Start and End Dates……………………………………………………
...
Market Capitalization of Top 30 Banks Worldwide, by Nationality……………………
...
Summary of the Cost of Banking Crises…
...
1
...
30
A
...
Preemptive Responses in Selected G-20 Countries…
...
3
...
33
A
...
Top 30 Banks in the World By Market Capitalization
...
Foreign Claims by Nationality of Reporting Banks………………………………………13
2
...
14
3
...
16
4
...
17
5
...
18
6
...
S
...
19
7
...
S
...
19
8
...
S
...
20
9
...
23
10
...
24
11
...
25
12
...
26

...
INTRODUCTION
Since 2007, the world has experienced a period of severe financial stress, not seen since the
time of the Great Depression
...
S
...
Many countries were significantly affected by these adverse shocks, causing
systemic banking crises in a number of countries, despite extraordinary policy interventions
...
Such crises are not specific to the recent past or specific countries –
almost no country has avoided the experience and some have had multiple banking crises
...
Banking crises are often preceded by
prolonged periods of high credit growth and are often associated with large imbalances in the
balance sheets of the private sector, such as maturity mismatches or exchange rate risk, that
ultimately translate into credit risk for the banking sector
...

(2005), Laeven and Valencia (2008), and Reinhart and Rogoff (2009)
...
S
...
The update makes several
improvements to the earlier database, including an improved definition of systemic banking
crisis, the inclusion of crisis ending dates, and a broader coverage of crisis management
policies
...
2
The new data show that there are many commonalities between recent and past crises, both in
terms of underlying causes and policy responses, yet there are also some striking differences
in the economic and fiscal costs associated with the new crises
...
The median output loss (computed as deviations of actual output
from its trend) is 25 percent of GDP in recent crises, compared to a historical median of 20
percent of GDP, while the median increase in public debt (over the three year period
2

The banking crisis dataset is publicly available www
...
com/Data
...
These differences in part reflect an increase in the
size of financial systems, the fact that the recent crises are concentrated in high-income
countries, and possibly differences in the size of the initial shock to the financial system
...

Policy responses broadly consisted of the same type of containment and resolution tools as
used in previous crisis episodes
...
However, recapitalization policies were implemented more quickly
this time around
...

While all these extraordinary measures have contributed to reduce the real impact of the
recent crisis, they also have increased the burden of public debt and the size of fiscal
contingent liabilities, raising concerns about fiscal sustainability in a number of countries
...
Section II presents a brief review of the events that led to the
2007-2009 global crises
...
Section IV describes the policy responses and contrasts
them with past crises
...
Section VI concludes
...
THE 2007-2009 GLOBAL CRISIS: A SYNOPSIS
Over the decade prior to the crisis, the United States and several other advanced economies
experienced an uninterrupted upward trend in real estate prices, which was particularly
pronounced in residential property markets
...
g
...
, 2010; Obstfeld and Rogoff, 2009; and Taylor, 2009)
...
They did so by moving assets off-balance sheet into special
purpose vehicles that were subject to weaker capital standards and by funding themselves

5
increasingly short-term and in wholesale markets rather than traditional deposits
...
The growing importance
of this shadow banking system highly dependent on short term funding, combined with lax
regulatory oversight, was a key contributor to the asset price bubble (Gorton, 2008,
Brunnermeier, 2009, and Acharya and Richardson, 2009)
...
The rise in asset prices decreased measured “value at risk” at financial institutions,
creating spare capacity in their balance sheets and leading to an increase in leverage and
supply of credit (Adrian and Shin, 2008)
...
Easy
access to the equity accumulated in their homes led households to increase their leverage
substantially
...
The asset price
boom was further fueled by an explosion of subprime mortgage credit in the United States
starting in 2002 and reaching a peak around mid-2006 (Dell’Ariccia et al, 2008)
...
S
...
However, these first
signs were limited to problems in the subprime mortgage market
...
K
...
S
...

To alleviate liquidity shortages, the U
...
Federal Reserve reduced the penalty to banks for
accessing its discount window, and later that year created the Term Auction Facility
...
Problems intensified in the United States with the bailout of Bear Stearns,
and later in the year with the collapse of investment bank Lehman Brothers, and the
government bailouts of insurer AIG and mortgage lenders Freddie Mac and Fannie Mae
...
But as the crisis
mounted, so did the policy responses, with many countries announcing bank recapitalization
packages and other support for the financial sector in late 2008 and early 2009
...
One commonality among these
crises is a substantial rise in private sector indebtedness, with the infected sectors besides
banks being the household sector (as in the current U
...
crisis and the Nordic crises of the
nineties), the corporate sector (as in the case of the 1997-98 East Asian financial crisis), or

6
both
...

When such crises erupt, they generally trigger losses that spread rapidly throughout the
financial system by way of downward pressures on asset prices and interconnectedness
among financial institutions
...
S
...
S
...
S and elsewhere
...
WHICH COUNTRIES HAD A SYSTEMIC BANKING CRISIS IN 2007-2009?
The financial crisis that started in the United States in 2007 spread around the world,
affecting banking systems in many other countries
...
We also identify countries that
can be considered as cases of borderline banking crises, and countries that escaped a banking
crisis (either because they evaded a crisis through successful policies or because they were
not hit by the negative shock emanating from the United States)
...

We consider the first year that both criteria are met to be the starting year of the banking
crisis, and consider policy interventions in the banking sector to be significant if at least three
out of the following six measures have been used:3

1) extensive liquidity support (5 percent of deposits and liabilities to nonresidents)
2) bank restructuring costs (at least 3 percent of GDP)

3

We express, when possible, the magnitude of policy interventions and associated fiscal costs in terms of GDP
rather than banking system size to control for the ability of a country’s economy to support its banking system
...


7
3) significant bank nationalizations
4) significant guarantees put in place
5) significant asset purchases (at least 5 percent of GDP), and
6) deposit freezes and bank holidays
...
4
Direct bank restructuring costs are defined as the component of gross fiscal outlays directing
to restructuring the financial sector, such as recapitalization costs
...
We define significant direct
restructuring costs as those exceeding 3 percent of GDP
...
We define significant asset purchases as those exceeding 5 percent of GDP
...
6
Actions that only raise the level of deposit insurance coverage are not deemed significant
...

In the past, some countries intervened in their financial sectors using a combination of less
than three of these measures but on a large scale (for example, by nationalizing all major
banks in the country)
...
For Euro-area countries, we also consider liquidity support to
be extensive if in a given semester the increase in this ratio is at least 5 percentage points
...
As a result, the central banks of some Euro area countries (notably Germany
and Luxembourg) had already large pre-crisis levels of claims on the financial sector
...
Therefore, an estimate of total liquidity injected would
include schemes such as the Special Liquidity Scheme (185 bn pounds sterling) in the United Kingdom and
Norway’s Bond Exchange Scheme (230 bn kronas), as well as liquidity provided directly by the Treasury
...


8
deemed systemic when either (i) a country’s banking system exhibits significant losses
resulting in a share of nonperforming loans above 20 percent or bank closures of at least 20
percent of banking system assets) or (ii) fiscal restructuring costs of the banking sector are
sufficiently high exceeding 5 percent of GDP
...

Quantitative thresholds to implement our definition of a systemic banking crisis are
admittedly arbitrary; therefore, we also maintain an additional list of “borderline cases” that
almost met our definition of a systemic crisis
...
, 2005; Laeven and Valencia, 2008; and Reinhart and Rogoff, 2009) that relied on a
qualitative approach to determine banking crises as situations in which “a large fraction of
banking system capital has been depleted”
...
For
each case, we also indicate the exact criteria that are met
...
In total, we identify 13 systemic banking crises and 10 borderline cases since
the year 2007
...
1 in the Appendix presents more detailed information about the
policy interventions in these cases
...
9

7

One concrete historical example is Latvia’s 1995 crisis, when banks totaling 40 percent of financial system’s
assets were closed, depositors experienced losses, but few of the interventions listed above were implemented
...
As a consequence, a few cases listed as systemic banking crisis in our previous release, would
under this definition be considered borderline cases: Brazil 1990, Argentina 1995, Czech Republic 1996,
Philippines 1997, and United States 1988
...


9
Table 1
...
Extensive liquidity
support is defined as a situation where central bank claims on the financial sector exceed 5 percent of deposits
and foreign liabilities and is at least twice as large as pre-crisis levels; direct bank restructuring costs are
considered significant when they exceed 3 percent of GDP and exclude liquidity and asset purchase outlays;
guarantees on liabilities are considered significant when they include actions that guarantee liabilities of
financial institutions other than just increasing deposit insurance coverage limits; nationalizations are significant
when they affect systemic financial institutions
...


10
Most policy packages announced in countries that do not meet our definition can be seen as
pre-emptive interventions
...
For instance, Argentina, Brazil, China, India, Indonesia,
Mexico, Saudi Arabia, South Africa, and Turkey all did not announce direct financial sector
support measures that involved fiscal outlays
...
For example, Mexico announced
a guarantee on commercial paper up to a limit of 50 billion pesos
...
Appendix Table A
...
The
differences between announced and actually used amounts are quite striking in a number of
cases, with the actual usage of announced packages on average being small (see also Cheasty
and Das (2009) for a comparison between announcements and used amounts)
...
We now expand our previous release by dating the end of
each episode
...
In case the first
two years record growth in real GDP and real credit, the crisis is dated to end the same year it
starts
...
In a number of
cases this methodology results in long crisis durations, which sometimes is the consequence
of additional shocks affecting the country’s economic performance
...
As of end-2009, none
of the recent crises had ended according to the definition we use in this paper
...
Start and end dates for all episodes are
reported in Table 2, in which we also report output losses (to be defined in the next section)
...

Bank credit series are deflated using CPI from WEO
...
When credit data is not available, the end date is determined as the first year before GDP
growth is positive for at least two years
...


Table 2
...
For these countries, end dates are based on GDP growth only
...

3/ Borderline cases
...

Output losses computed as the cumulative difference between actual and trend real GDP, expressed as a percentage of trend real GDP for the period [T, T+3] where T is the starting year of the crisis
...

Source: World Economic Outlook (WEO), Laeven and Valencia (2008), and authors’ calculation
...
POLICY RESPONSES IN THE 2007-2009 CRISES: WHAT IS NEW?
Crisis management starts with the containment of liquidity pressures through liquidity
support, guarantees on bank liabilities, deposit freezes, or bank holidays
...
It is intrinsically difficult to compare the success of crisis
resolution policies given differences across countries and time in the size of the initial shock
to the financial system, the size of the financial system, the quality of institutions, and the
intensity and scope of policy interventions
...

The policy responses during the 2007-2009 crises episodes were broadly similar to those
used in the past
...
Like the crises of the past, during which bank holidays and
deposit freezes have rarely been used as containment policies, we have no records of the use
of bank holidays during the recent wave of crises, while a deposit freeze was used only in the
case of Latvia for deposits in Parex Bank
...
All
these measures have been used in the past, but this time around they seem to have been put in
place quicker (for detailed information about the frequency of policy interventions in past
crisis episodes, see Laeven and Valencia, 2008)
...
The large international networks and cross-border exposures of these
financial institutions helped propagate the crisis to other countries
...
This prompted large-scale
government interventions in the financial sector (including preemptive measures in some
countries)
...
S
...
, 2010)
...
Cross border banking
exposure to the US varied a great deal across countries, ranging from less than 1 percent for
Mexico to 300 percent for Switzerland
...


13
Figure 1
...
Figures
denote foreign claims by nationality on the United States at end-2006 as percentage of home country GDP
...
Not only was liquidity provision large, as illustrated in Figure 2, but
it was also made available more broadly through a larger set of instruments and institutions
(including nonbank institutions), and under weaker collateral requirements
...
These actions were also accompanied in some cases by the introduction
of nonconventional facilities to fund non-financial companies directly, such as the Federal
Reserve’s Commercial Paper Facility and the Bank of England’s Asset Purchase Facility
...
The median change from the pre-crisis level to its peak in the
ratio of central bank claims against the financial sector to deposits and foreign liabilities
amounts to 5
...
11 This is about half its median in past crisis episodes
...
4 and 14
...
Liquidity support is computed as the ratio of Central Bank Claims on deposit
money banks (line 12 in IFS) to total deposits and liabilities to non-residents
...


14
purposes, Figure 2 also reports the historical median of liquidity support among high-income
countries only, since most recent crises occurred in high-income economies (all crisis
countries except Mongolia, Latvia, and Ukraine)
...
Emergency Central Bank Liquidity Support
Over the period 2007 to 2009
25

20

15

10

5

Liquidity Support from the Treasury

All (old)

Switzerland

Sweden

Spain

Slovenia

Russia

Portugal

Kazakhstan

Hungary

Greece

USA

France

UK

Ukraine

Netherlands

Mongolia

Luxembourg

Latvia

Ireland

Iceland

Denmark

Germany

Belgium

Austria

0

High Income (old)

Note: The shaded figures represent the change in the ratio of central bank claims on the financial sector over
total deposits and foreign liabilities between the peak of this ratio and the average for the year before the crisis
...
Dark-shaded bars denote systemic crisis cases, while
light-shaded bars denote non-systemic crises
...

Horizontal lines denote the medians classified by countries’ income level for historical data
...

Source: Laeven and Valencia (2008), IFS, and authors’ calculations
...

Slovenia shows the largest increase in liquidity funded by the treasury, amounting to close to
5 percent of deposits and foreign liabilities
...
13 Liquidity
injected in countries labeled as borderline has also been significant, in particular for Greece,
Russia, and Sweden
...

13

In the case of Latvia, the threshold used in our definition of extensive liquidity support is satisfied once
government deposits at Parex are counted as liquidity support
...
In Russia, liquidity support subsided quickly after reaching a peak of 20 percent of
deposits and foreign liabilities in 2009
...
All crisis countries except Ukraine (and
Kazakhstan, Sweden, and Switzerland among borderline cases) extended guarantees on bank
liabilities other than raising deposit insurance limits
...
1)
...
This time around,
asset guarantees were used in some cases, including Belgium and the United Kingdom
...
While direct
fiscal costs for Germany amount to just above 1 percent of GDP, total guarantees (including
those associated with the Bad Bank and financial institutions debt) reached about 6 percent
...
As a measure of the time it took the withdraw liquidity support, we compute the
number of months between the peak of liquidity support and the month when liquidity
support declined to its pre-crisis level
...
However, this time around, as of end-2009 only
Denmark, Germany, Hungary, Luxembourg, the Netherlands, and Switzerland saw their
liquidity support returned to pre-crisis levels, suggesting that liquidity remained an issue for a
prolonged time in recent crises
...
Figure 3 shows the change in the monetary base between its peak
during the crisis and its level one year before the crisis, expressed in percentage points of
GDP
...
Relatively larger financial systems
and credibility of monetary policy in high income economies may explain this difference
...
Yet, we treat
it as guarantees, and therefore do not list Germany as also having met the significant asset purchases threshold
...
For Euro-area countries, reserve money corresponds to the
aggregation of currency issued and liabilities to depository corporations, divided by Euro area GDP
...
Monetary Expansion
Over the period 2007 to 2009 
14%
12%
10%
8%
6%
4%
2%

All (old)

Switzerland

Spain

Sweden

Russia

Slovenia

Portugal

Kazakhstan

Hungary

France

Greece

UK

USA

Ukraine

Netherlands

Mongolia

Latvia

Ireland

Iceland

Germany

Belgium

Luxembourg

-4%

Denmark

-2%

Austria

0%

High Income (old)

Note: Change in monetary base in percentage points of GDP between the peak and its level one year before the
crisis
...
All (old): all countries; High income (old): highincome countries
...


About 70 percent of fiscal outlays correspond to public sector recapitalizations of financial
institutions
...
The median difference between the time
it took to implement public recapitalization programs and the time that liquidity support
became extensive (that is, when liquidity support exceeded 5 percent) is zero months for the
recent crises compared to 12 months for past crises (Figure 4)
...
Policymakers therefore often prolong the use of liquidity
support and guarantees in the hope that problems in the banking sector subside
...
17
16

For bank recapitalizations, we only consider “comprehensive” recapitalization packages in which public
funds were used, thereby excluding ad hoc interventions and biasing upwards our estimate of the response time
...
We include the last two in our calculation because of the
size of the affected institutions
...
We do not include
Iceland because of limited data on liquidity support as to compute the date when it became extensive
...
In addition, many banks have temporarily been allowed to avoid the
recognition of market losses and thereby overstate regulatory capital
...
Timing of Recapitalization Policies
Over the period 2007 to 2009
in months
14
12
10
8
5

6

-1

0

-3

-1

-3

USA

0

0

UK

2

Ukraine

1

Netherlands

2

2

Luxembourg

4

5

-2

All (old)

Latvia

Ireland

Germany

Denmark

Belgium

Austria

-4

High-Income (old)

Note: Time in months between moment when liquidity support became extensive and implementation of
recapitalization plans
...

Source: Laeven and Valencia (2008) and authors’ calculations
...
Although divestments (or repayments) of
government support on average start about one year from the start of the crisis, suggesting
that the early repayments from the TARP capital support program witnessed in the US are
not uncommon, government participation in banks has in many cases largely exceeded the
initially envisioned holding period
...
In some cases,
divestment took place by tender, through sales of entire institutions to foreign investors or
large domestic banks; in other cases, it took place more gradually through markets
...
This is striking given
that bank failures are rare events in most countries, in part due to regulatory forbearance and
too-big-to fail or close problems
...
Iceland is followed by Greece and Belgium with banks that failed or received
18

A comprehensive analysis of guidelines for exit strategies from crises can be found in Blanchard et al
...


18
government assistance representing 80 percent or more of banking system assets in each of
these three countries
...
In terms of banks receiving government assistance, Greece tops the charts,
with banks holding 80 percent of total banking system assets receiving some form of
government assistance
...

Figure 5
...
of

Kazakhstan

Japan

Italy

Ireland

Iceland

Greece

Germany

France

Denmark

China

Belgium

0%

Austria

20%

Government-assisted banks, fraction of total banking assets (%)

Note: Government-assistance implies public capital support resulting in the government holding a minority
stake in the bank
...

Source: Authors’ calculations based on data from IMF, EU, FDIC, and JIDC
...
S
...

Excluding banks that received public assistance, the year 1989 during the U
...
savings and
loan crisis is by far the worst year on record, with banks holding over 6% of the deposit
market failing
...
Of course, the
U
...
failure list excludes such large financial institutions as Fannie, Freddie Mac, and AIG
because they are not banks, although they meet our definition of failure, and we could
therefore underestimate the magnitude of financial distress in the United States
...
U
...
Bank Failures: Past and Present
U
...
bank failures since the 1930s have come in three waves: the Great Depression era of the 1930s,
the savings and loans crisis of the 1980s, and the recent mortgage crisis of the late 2000s, with the
number of bank failures peaking in the years 1937, 1989, and 2009, respectively
...

Note that 2005 and 2006 were the only two years since 1934 that reported no bank failures
...
U
...
Bank Failures: Fraction of Failed Banks
Over the period 1934 to 2010
4
...
0%
3
...
0%

Fraction of failed banking institutions (including assistance)

2
...
0%
1
...
0%

2010

2005

2000

1995

1990

1985

1980

1975

1970

1965

1960

1955

1950

1945

1940

0
...
5%

Note: The figures include all failures and assistance transactions across 50 U
...
states and Washington DC, as percent of total number of
institutions
...
Source: FDIC
...
S
...
After accounting for this development, the recent failures look a
lot worse
...
S
...
Using this definition of failure, 2009 is by far the worst on record
...


Figure 7
...
S
...
S
...
Source: FDIC
...
Median
losses are relatively stable over the examined period (data on loss rates are available starting in 1986),
and roughly the same during the recent crisis as compared to the savings and loan crisis
...
In terms of losses to the deposit insurer, we do not have data
for the year 2009 yet, but losses were significantly lower in 2008, at 0
...
S
...
97 percent of U
...
GDP
...
S
...


Figure 8
...
S
...
S
...
Loss rates are expressed as a percentage of
total bank assets
...
We report median loss rates by year
...
Estimated losses reflect unpaid principal amounts
deemed unrecoverable and do not reflect interest that may be due on the DIF’s administrative or subrogated claims should its principal be
repaid in full
...


A consequence of these dramatic bank failures has been a re-organization of the worlds’
financial map, with large players becoming significantly smaller, freeing up space for new
players, in particular emerging markets
...
S
...
Before the crisis, at end-2006, the
top 30 banks worldwide had a total stock market capitalization of about US$ 3
...
S
...
K
...
19 Countries with a systemic banking crisis in 20072009 dominated the banking arena in 2006 with a share of close to 60 percent of the total
...
4
...
Twelve banks dropped from the top-30 list of 2006,
with 3 banks being acquired by other institutions
...
The largest decline in market
capitalization corresponds to Citigroup—excluding banks that were acquired by other
institutions—however, at the country-level, the Netherlands (including Fortis) experienced
the largest average decline, followed by Japan
...

Table 3
...
8
20
...
5
13
...
8
8
...
9
2
...
9
0
...
5
9
...
5
4
...
8
5
...
9
5
...
4
2
...
0
8
...
0
4
...
0
12
...
0
1
...
0
100
...

Source: Bankscope
...
4
...
These include Australia, Brazil,
China, and Sweden
...
The United States has fallen to
only 5 banks in this list, together holding only 21 percent of the market capitalization of the
world’s 30 largest banks in 2009 compared to 40 percent in 2006
...

Other clear losers include the Netherlands and Japan
...
Other clear winners are
Australia and Canada whose large banks mostly escaped the US mortgage crisis
...
HOW COSTLY ARE THE 2007-2009 SYSTEMIC BANKING CRISES?
We estimate the cost of each crisis using three metrics: direct fiscal costs, output losses, and
the increase in public sector debt relative to GDP
...
3 for a list of items included), and capture the direct fiscal implications of
intervention in the financial sector
...
21 Output losses and the
increase in public debt capture the overall real and fiscal implications of the crisis
...
Summary of the Cost of Banking Crises
Over the period 1970-2009
Direct Fiscal Cost

Increase in Public Debt
Medians (% of GDP)

Output Losses

Old crises (1970-2006)
Advanced economies
3
...
2
32
...
5
12
...
4
All
10
...
3
19
...
9
25
...
8
Other economies
4
...
9
4
...
9
23
...
5
Note: New crises include Austria, Belgium, Denmark, Germany, Iceland, Ireland, Latvia, Luxembourg,
Mongolia, Netherlands, Ukraine, United Kingdom, and United States
...


The recent crises are overall more costly in terms of output losses and increases in debt, but
less so in terms of direct fiscal outlays compared to the average crisis of the past
...
3
...

21

Output losses are computed as the cumulative sum of the differences between actual and trend real GDP over
the period [T, T+3], expressed as a percentage of trend real GDP, with T the starting year of the crisis
...
Real GDP is extrapolated
using the trend growth rate over the same period
...
For recent crisis episodes,
GDP projections are based on April 2010 WEO
...
Wherever our methodology results in a crisis duration over 5 years, or when data availability impede
us from applying our methodology, we set the end year as the fifth year from the crisis start year
...

The median direct fiscal costs associated with financial sector restructuring for the 20072009 systemic banking crises amounts to almost 5 percent of GDP, about half its historical
median of 10 percent
...
Two horizontal lines indicate the median of fiscal costs in all
previous crises and that among previous high-income crisis episodes
...
For Greece and Kazakhstan, at least half of it is also liquidity assistance from the
treasury, while only for Russia the entire amount corresponds to recapitalization
...
Iceland shows up with the highest fiscal outlays, at 13 percent of GDP
...
Direct Fiscal Costs
In percent of GDP and over the period 2007-2009
14%
12%
10%
8%
6%
4%
2%

Switzerland

Sweden

Spain

Slovenia

Russia

Portugal

Hungary

Kazakhstan

Greece

USA

France

UK

Ukraine

Mongolia

All (old)

Netherlands

Luxembourg

Latvia

Ireland

Iceland

Germany

Denmark

Belgium

0%

High Income (old)

Note: Dark-shaded bars denote systemic banking crises episodes, and light-shaded bars borderline cases
...
Income groups are based on the World Bank
country classification
...

Source: Laeven and Valencia (2008) and Authors’ calculations

22
23

These higher fiscal costs in part reflect an increase in average banking system size
...


24
We regard the lower direct fiscal outlays associated with high income countries, relative to
all past crises, a consequence of the greater flexibility these countries have in supporting their
financial system indirectly through expansionary monetary and fiscal policy and direct
purchases of assets that help sustain asset prices
...
3)
...
The median debt increase among recent crises is 24 percent of GDP, about 8
percentage points higher than its historical median of 16 percent
...

Figure 10
...

Increase in public debt is the increase in gross general government debt (central government debt if not
available) over GDP, estimated over the 3 year period following the start of the crisis using WEO debt
forecasts
...
All (old): all past crises
in emerging and high-income countries; High income (old): all past crises in high-income countries
...


Figure 10 shows the increase in the public debt burden for each crisis and also reports the
historical median of the increase in public debt at crisis times
...
For the 2007-2009 crises, we use the fall WEO debt
projections from the year before the crisis year as pre-crisis debt figures (i
...
, September
2006 WEO for the UK and US and October 2007 WEO for all other recent crises) and the

25
Spring WEO 2010 debt projections for the post-crisis debt figures
...
24
Among the recent borderline cases, France, Greece, Portugal and Spain exhibit the largest
expected increases in debt
...
Recent
developments in Greece, since our cutoff date at end-2009, while significant, are still not
sufficient for it to qualify as a systemic banking crisis, at least as of April 2010
...
Increase in Public Debt and Direct Fiscal Costs

Difference between increase in public debt
and direct fiscal costs, relative to GDP

In percent of GDP
80%
60%
40%
20%
0%
0

10

20

-20%
-40%

Previous crisis episodes

30
40
50
Real GDP per capita (in 2000 US$)

60

70
Thousands

2007-2009 crises

Note: Circles denote the new systemic and borderline episodes, while diamonds denote old episodes
...

The x-axis corresponds to real GDP per capita, measured in 2000 US$
...

Source: Laeven and Valencia (2008), WEO, and authors’ calculations
...
This
difference appears to be positively correlated at about 0
...
Given that direct fiscal outlays to support the financial sector generally increase
public debt, the difference between the increase in public debt and fiscal costs reflect in part
the outcome of measures taken to support the real sector
...
Our choice of sources is guided by the availability of general government debt
...
Our primary data source is WEO
...


26
explained by discretionary fiscal policy and automatic stabilizers
...
Clearly,
expansionary fiscal policy indirectly supports the financial sector by stimulating aggregate
demand, which in turn props up loan demand and lowers the risk of loan defaults
...
We estimate median output
losses for the recent crises of 25 percent of GDP, which is almost 5 percentage points higher
than its historical median of 20 percent
...
Therefore, our methodology does not distinguish between permanent and
transitory output losses
...
Figure 12 shows the results
...
Output Losses
In percent of potential output

100%

75%

50%

25%

All (old)

Switzerland

Sweden

Spain

Slovenia

Portugal

Kazakhstan

Greece

Hungary

France

UK

USA

Ukraine

Netherlands

Mongolia

Luxembourg

Latvia

Ireland

Iceland

Germany

Denmark

Belgium

Austria

0%

High Income (old)

Note: Dark-shaded bars denote systemic banking crises episodes, and light-shaded bars denote borderline cases
...
Trend GDP is computed applying an HP filter to the real GDP series over
the 20-year period prior to the crisis
...
All (old): all past crises; High income (old): all past crises in high-income countries
...

25

The medians reported in the graph are based on output losses that have been recomputed for all crisis
episodes using the methodology employed in this paper rather than by relying on estimates of output losses in
Laeven and Valencia (2008)
...
The new output loss estimates are on average similar to those in Laeven and Valencia
(2008), though they differ for low-income countries and countries affected by large shocks, such as wars
...
The output losses for Ireland and Latvia stand out at over 100 percent of
potential GDP
...
On average, countries with larger financial systems, and especially those
that experienced rapid expansion prior to the crisis (such as Iceland, Ireland, and Latvia),
were hit hardest
...
CONCLUDING REMARKS
This paper updates the Laeven and Valencia (2008) database on systemic banking crises
through end-2009 to include the recent wave of financial crises following the U
...
mortgage
crisis of 2007
...
The update makes several improvements to the earlier
database, including an improved definition of systemic banking crisis, the inclusion of crisis
ending dates, and a broader coverage of crisis management policies
...
All crises share a containment phase
during which liquidity pressures are contained through liquidity support and in some cases
guarantees on bank liabilities
...
These
common patterns echo earlier findings summarized in Honohan and Laeven (2005) and
Reinhart and Rogoff (2009)
...



First, the recent crisis was concentrated in advanced economies, in particular those
with large and integrated financial systems, unlike many of the boom-bust cycles
observed in the past that centered on emerging market economies
...




Second, while the intensity of policy interventions has been comparable to past crisis
episodes, the speed of intervention and implementation of resolution policies was
faster this time
...
Recapitalization
policies in particular were implemented much sooner than in the past, contributing to
lower direct fiscal outlays
...
These large scale public
interventions were possible in part because most of the crisis-affected countries are
high-income countries with relatively greater institutional quality and credibility of
policy actions
...


The lower short-run fiscal costs in part reflect the relatively swift action with which
governments announced recapitalization measures and took other actions to restore the health
of the financial system
...
The significant support deployed through monetary and fiscal policies, including
coordinated international efforts to ensure adequate foreign exchange liquidity, and a timely
implementation of measures to address solvency problems in the financial system have
significantly contributed to reduce the real impact of the recent crises
...

However, over the medium term, these indirect support measures have significantly
increased the burden of public debt and the size of government contingent liabilities, raising
concerns about fiscal sustainability in a number of countries
...

It may therefore be premature to hail recent crisis management efforts as being more
successful than those of the past
...
, Hoboken, New Jersey
...

Blanchard, Olivier J
...

Brunnermeier, Markus, 2009, “Deciphering the Liquidity and Credit Crunch 2007-2008,”
Journal of Economic Perspectives, Vol
...
77–100
...
), Systemic Financial
Crises: Containment and Resolution
...
K
...

Cheasty, Adrienne, and Udaibir Das, 2009, “Crisis-Related Measures in the Financial System
and Sovereign Balance Sheet Risks,” IMF Policy Paper SM/09/91, Washington, DC
...
62, pp
...

Dell’Ariccia, Giovanni, Luc Laeven, and Deniz Igan, 2008, “Credit Booms and Lending
Standards: Evidence from the Subprime Mortgage Market,” IMF Working Paper
08/106, Washington, DC
...
14358
...
), 2005, Systemic Financial Crises: Containment and
Resolution
...
K
...

Keys, Benjamin, Tanmoy Mukherjee, Amit Seru, and Vikrant Vig, 2010
...
125, pp
...

Laeven, Luc, and Fabian Valencia, 2008, “Systemic Banking Crises: A New Database,” IMF
Working Paper No
...

Mian, Atif, and Amir Sufi, 2009, “House Prices, Home Equity-Based Borrowing, and the
U
...
Household Leverage Crisis,” American Economic Review, forthcoming
...

Taylor, John, 2009, Getting Off Track: How Government Actions and Interventions Caused,
Prolonged, and Worsened the Financial Crisis, Hoover Press
...


Table A
...
Systemic Banking Crises Policy Responses
During the years 2007 to 2009
Country

Liquidity Support

Gross Restructuring Costs

(percentage points increase in
central bank claims on
financial institutions over
deposits and foreign liabilities)

(recapitalization and other
restructuring costs, excluding
liquidity and asset purchases,
in percent of GDP)

Austria

8
...
1

Guarantees: 0
...
0

5
...
7

Denmark

10
...
8

Germany

2
...
2

Iceland

2
...
0

Ireland

13
...
6

Latvia

3
...
5

Luxembourg

4
...
7

DI raised from €20,000 to €100,000
...
5 billion guarantee on Dexia’s debt
...
4

3
...


Zoos Bank (2009)

Netherlands

3
...
5

DI raised to €100,000
...

Fortis bonds (€5 bn) and ING bonds (€10 bn)
...
6

4
...

Bank and non-bank bond issues
...

Deposit-like insurance instruments
...

Interbank loans and bank debt (capped at €400
billion)
...


Purchases: 0
...
3

DI raised from UAH 50,000 to 150,000 until
1/1/11
...

DI raised to €50,000
...
5

4
...
1

3
...
4
Guarantees: 14
...
0

DI raised from ￡35,000 to 50,000
...

Blanket guarantee on Northern Rock and
Bradford & Bingley wholesale deposits
...


DI raised from $100,000 to $250,000 (until end2009)
...

Full guarantee on transaction deposits
...


Fannie Mae, Freddie Mac, AIG
(all 2008)
...

€360 billion in guarantees for refinancing credit
institutions
...
4

Greece

18
...
7

DI raised from €20,000 to €100,000
...


Hungary

1
...
1

Unlimited protection to depositors of small banks
...
6

2
...
7 million to T5 million
...
5

Russia

22
...

Debt securities issued by credit institutions (up to
12 percent of GDP)
DI raised from R400,000 to R700,000
...


1
...
3

Spain

4
...
1

0
...
8

1
...
7

Unlimited protection for all deposits by
individuals and small enterprises until end-2010
...

DI raised from €20,000 to €100,000
...

DI raised from SEK 250,000 to SEK 500,000
...
5 trillion)
...


31

France

Banco Portugues de Negócios
(small bank) (2008)

Table A
...
Preemptive Crisis Responses in Selected G-20 Countries
During the years 2007 to 2009
Country

Gross Restructuring Costs

(Percentage points increase in
central bank claims on
financial institutions over
deposits and foreign liabilities,
relative to pre-crisis level)

Australia

Liquidity Support

(recapitalization and other
restructuring costs, excluding
liquidity and asset purchases,
in percent of GDP)

Asset Purchases and
Guarantees
(Funded by treasury
and central bank, in
percent of GDP)

Guarantees on Liabilities

Nationalizations

(significant: in addition to increasing deposit
insurance (DI) ceilings, guarantees of other
liabilities)

(State takes control over
institutions; year of
nationalization between
brackets)

Unlimited coverage to deposits (if above 1
million, only those with maturity<5 years)
...

Canada

1
...
4

Italy

2
...
8
Purchases: 1
...
1

<0
...
6
(SME’s)
Purchases: <0
...
1

0
...
8
(SME’s)

Source: IMF Staff Reports, Mayer Brown, Official websites, and IFS
...


32

Increased deposit insurance in some
provinces
...
3
...
1
2
...
1
0
...
7
0
...
0
6
...
3
0
...
7

Capital Assistance Program
Capital injection in Fionia Bank
Loan to Fionia Bank
Total Fiscal Outlays

2
...
1
0
...
1

SPPE acquisition of subordinated bonds
Second stage recapitalization (BNP, SG, Dexia)
Total Fiscal Outlays
Financial Security Assurance Inc
...
5
0
...
0
0
...
2
0
...
4
6
...
7
1
...
6

Capital injection in FHB (mortgage lender)
FX loans to large banks
Total Fiscal Outlays

0
...
6
2
...
1

5
...
7

3
...
0

1
...
4

3
...
6

1
...
0

13
...
6

7
...
4
1
...
8

3
...
5
2
...
9

4
...
7

7
...
9

1/

Net

6
...
0

3
...
5
0
...
9
12
...
0
4
...
8

Recoveries

1
...
9
0
...
3

2
...
8

2
...
8

1
...
2
0
...
7

0
...
1

Public Recapitalization program

4
...
0
0
...
8
1
...
7
14
...
4
0
...
3
0
...
8
0
...
1
1
...
2
4
...
5

-0
...
8

1
...
7

0
...
3

1/ It includes repayments up to end-2009 of capital support as well as interest and fees generated from loans and guarantee
programs for the cases where the data was available
...
3/ In our baseline case we do not
include the increase in debt that would result from the Icesave crisis as part of the fiscal costs
...

Source: IMF staff reports, official websites, and Mayer Brown
...
4
...


France

68,723

41,302

27 Westpac Banking Corp

Australia

43,137

28 ABN Amro Holdings

Netherlands

64,717

Failed

28 Australia and New Zealand Banking

Australia

42,473

29 Fortis

Belgium/
Netherlands
Canada

60,674

8,886

59,686

64,894

30 Royal Bank of Canada

Total

29 Crédit Agricole
3,377,767 1,633,871

France

41,302

30 Nordea Bank

Sweden
Total

41,284
2,153,554

Note: Shaded ranking positions on left list indicate banks no longer among the top thirty in 2009, while shaded ranking positions on right
list indicate banks that entered the top 30 list in 2009
...




---