Friday, January 6, 2012

Controlling the fiscal costs of banking crises

The CFA Institute highlighted an interesting article from the World Bank on Controlling the fiscal costs of banking crises.  It summarized the article as follows
World Bank researchers [now current Governor of the Irish Central Bank Patrick Honohan and Daniela Klingebiel] use regression analysis to demonstrate the least and most costly ways to bail out a nation's failing banking systems. Forty countries make up the database. 
The conclusion is that unlimited deposit guarantees, open-ended liquidity support, repeated recapitalization, debtor bailouts, and regulatory forebearance all add tremendously to the cost of a bailout.
The paper was written in 2000 and the authors concluded
that the findings in this paper tilt the balance in favor of a strict rather than accommodating approach to crisis resolution.
Exactly what your humble blogger has championed with the blueprint for saving the global financial system.

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