Responding to Banking Crises

A common legacy of banking crises is a large increase in government debt, as fiscal resources are used to shore up the banking system. Do crisis response strategies that commit more fiscal resources lower the economic costs of crises? Based on evidence from a sample of 40 banking crises we find that the answer is negative. In fact, policies that are riskier for the government budget are associated with worse, not better, post-crisis performance. We also show that parliamentary political systems are more prone to adopt bank rescue measures that are costly for the government budget. We take advantage of this relationship to instrument the policy response, thereby addressing concerns of joint endogeneity. We find no evidence that endogeneity is a source of bias.Bank restructuring;Banking sector;Economic growth;Economic models;Economic recovery;Governance;Government expenditures;Public finance;Stabilization measures;deposit insurance, recapitalization, pre-crisis, debt crisis, currency crisis, crisis episodes, banking system, crisis resolution, bank recapitalization, asset management, asset management companies, financial crises, financial crisis, deposit insurance scheme, regulatory forbearance, crisis management, bank depositors, crisis recovery, bank credit, post-crisis period, resolution of banking crises, systemic financial crises, post-crisis growth, sovereign debt crisis, systemic bank restructuring, nationalization of banks, systemic banking crisis, bank nationalization, bank runs, financial distress, systemic banking crises, bank assets, crisis intervention, asset management company, capital account liberalization, bank closure, crisis management strategies, banking systems, crisis country, banking practices, financial risk, recession, bank shareholders, bank stakeholders, bank recapitalizations, banking institutions, containment phase, bank liabilities, currency crisis indicator, bank claims, bank policy, bank of england, cross-country experience, bank deposits, financial restructuring, bank creditors