Blogs & Comment

IMF study of banking crises

An IMF Working Paper released in September sheds some light on banking crises. In Systemic Banking Crises: A New Database, authors Luc Laeven and Fabien Valencia present a comprehensive data base on the banking crises that have occurred around the world in recent decades.
Whats a bit surprising is the number. There were 124 systemic banking crises spread across dozens of countries between 1970 and 2007 (see appendix).
A downer is the average fiscal cost (cost of government bailouts) of the crises. Fiscal costs, net of recoveries, associated with crisis management can be substantial, averaging about 13.3 percent of GDP, and can be as high as 55.1 percent of GDP, note the authors. The $1 trillion (U.S.) estimate bandied about for the U.S. financial crisis seems gargantuan but is still far below 13.3 per cent of U.S. GDP. Could the final cost end up being even more monumental?
Also on the depressing side are the output losses due to systemic banking crises. The IMF document says they have averaged about 20 per cent of GDP during the first four years of the crisis, and range from zero per cent to a high of 98 per cent of GDP.
Interestingly, there appears to be a negative correlation between output losses and fiscal costs, suggesting that the cost of a crisis is paid either through fiscal costs or larger output losses. Furthermore even in the absence of significant government intervention, fiscal losses may be large due to tax revenues forgone because of higher output losses.
Appendix: Canada was one of the few countries not to appear on the IMF list. An oligopolistic industry does have its advantages, it seems. Could lower levels of competition mean less pressure to lower credit standards?