Governments frequently assist troubled banks. This paper examines the fiscal aspects of such assistance: rationale, design criteria, methods, and macroeconomic implications. It concludes that (1) banks should be assisted only when there is a clear systemic risk; (2) assistance should be tied to a comprehensive restructuring program, minimize fiscal cost, be equitable and transparent, prevent recurrence, and facilitate a sound macroeconomic environment; (3) debt-based assistance will worsen public sector debt sustainability and will probably increase aggregate demand; and (4) assistance may require a substantial fiscal response (especially given the possible need for a looser monetary stance), which should feed iteratively into the choice of restructuring strategy.
Systemic bank restructing aims to improve bank performance - that is, restore solvency and profitability, improve the banking system's capacity to provide financial intermediation between savers and borrowers, and restore public confidence. The authors of this studyanalyzed the experiences of 24 countries that initiated reforms in the1980s and early 1990s.
In recent decades, many countries have experienced banking problems requiring a major—and expensive—overhaul of their banking systems. Often, the problems have domestic causes, such as weak banking supervision, political interference, and inadequate capital. Or a country’s banking system may be outmoded and in need of rebuilding, as in the case of many developing countries and all countries moving from centrally planned to market economies. Outside forces, such as a fall in the price of a key export product or commodity, can ignite or worsen a crisis.