Financial Crises
Chapter

Chapter 13. Resolution of Banking Crises: The Good, the Bad, and the Ugly

Author(s):
Stijn Claessens, Ayhan Kose, Luc Laeven, and Fabian Valencia
Published Date:
February 2014
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Author(s)
Luc Laeven and Fabián Valencia 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 or discussions, and Jeanne Verrier for outstanding research assistance.

Since 2007, the world has experienced a period of severe financial stress not seen since the time of the Great Depression. This crisis started with the collapse of the subprime residential mortgage market in the United States and spread to the rest of the world through exposure to U.S. real estate assets, often in the form of complex financial derivatives, and a subsequent collapse in global trade. Many economies were severely affected by these adverse shocks, which caused systemic banking crises in a number of countries despite extraordinary policy interventions.

Systemic banking crises are disruptive events not only to financial systems but to the economy as a whole. Such crises are not specific to the recent past or to specific countries—almost no country has avoided the experience and some have had multiple banking crises. Although the banking crises of the past have differed in their underlying causes, triggers, and economic impacts, they share many commonalities. 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.

With the recovery from the 2007–09 crisis under way, some questions naturally arise: What caused the most recent crisis? Why did this crisis lead to varied levels of stress in different countries? How does the cost of this crisis compare with that of previous banking crisis episodes? And how do current policy responses differ from those of the past?

This chapter presents new and comprehensive data on the starting dates and characteristics of systemic banking crises during the period 1970–2009, building on earlier work by Caprio and others (2005), Laeven and Valencia (2008), and Reinhart and Rogoff (2009). In particular, it extends the database presented in Chapter 2, which builds on Laeven and Valencia (2008), to include the episodes following the U.S. mortgage crisis of 2007. The update makes several improvements to the earlier database, including an improved definition of systemic banking crises, the inclusion of crisis ending dates, and broader coverage of crisis management policies. The result is the most up-to-date banking crisis database available.1

The new data show that 2007–09 crises and past crises share many common characteristics, both in their underlying causes and in policy responses, yet there are also some striking differences in the economic and fiscal costs associated with the new crises. The economic cost of the new crises is on average much larger than that of past crises, both in output losses and in increases in public debt. The median output loss (computed as the deviation of actual output from its trend) is 25 percent of GDP in the 2007–09 crises, compared with a historical median of 20 percent of GDP, and the median increase in public debt (for the three-year period following the start of the crisis) is 24 percent of GDP in the 2007–09 crises, compared with a historical median of 16 percent of GDP. These differences reflect, in part, an increase in the size of financial systems, the concentration of the 2007–09 crises in high-income countries, and possible differences in the size of the initial shock to the financial system.

At the same time, direct fiscal costs to support the financial sector were smaller this time at 5 percent of GDP, compared with 10 percent of GDP for past crises, as a consequence of relatively swift policy action and the significant indirect support the financial system received through expansionary monetary and fiscal policy, the widespread use of guarantees on liabilities, and direct purchases of assets that helped sustain asset prices.

Policy responses broadly consisted of the same type of containment and resolution tools as used in previous crisis episodes. As in past crises, policymakers used extensive liquidity support and guarantees. However, recapitalization policies were implemented more quickly in the 2007–09 crises. In previous crises it took policymakers about one year from the time that liquidity support became extensive before comprehensive recapitalization measures were implemented; this time recapitalization measures were implemented about the same time that liquidity support became extensive.

Although these extraordinary measures contributed to reducing the real impact of the 2007–09 crises, they also increased the burden of public debt and the size of contingent fiscal liabilities, raising concerns about fiscal sustainability in a number of countries.

The chapter proceeds as follows. The first section presents a brief review of the events that led to the 2007–09 global crises. The second section defines a systemic banking crisis and presents a list of countries that meet this definition. The third section describes the policy responses and contrasts them with past crises. The fourth section presents the cost of the 2007–09 crises and a comparison with past episodes. The final section summarizes the differences between the 2007–09 crises and those of the past.

The 2007–09 Global Crisis: a Synopsis

During the decade before 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. The origins of this boom are still a source of debate, although there appears to be broad agreement that financial innovation in the form of asset securitization, government policies to increase home ownership, global imbalances, expansionary monetary policy, and weak regulatory oversight played important roles (Obstfeld and Rogoff, 2009; Taylor, 2009; and Key and others, 2010).

The boom in real estate prices was exacerbated by financial institutions’ ability to exploit loopholes in capital regulation, allowing banks to increase leverage significantly while maintaining capital requirements. They did so by moving assets off their balance sheets into special purpose vehicles that were subject to weaker capital standards and by increasingly funding themselves short term and in wholesale markets rather than with traditional deposits. These special purpose vehicles were used to invest in risky and illiquid assets (such as mortgages and mortgage derivatives) and were funded in wholesale markets (for example, through asset-backed commercial paper) without the backing of adequate capital. The growing importance of this shadow banking system that was 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).

Higher asset prices led to a leverage cycle by which increases in home values led to increases in debt. 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). A similar mechanism took place in the household sector, as perceived household wealth increased by virtue of rising home values. Easy access to the equity accumulated in their homes led households to increase their leverage substantially. Mian and Sufi (2011) estimate that the average homeowner extracted 25 to 30 cents for every dollar increase in home equity to be used in real outlays. 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 in mid-2006 (Dell’Ariccia, Laeven, and Igan, 2008).

The first signs of distress came in early 2007 from losses at U.S. subprime loan originators and institutions holding derivatives of securitized subprime mortgages. However, these first signs were limited to problems in the subprime mortgage market. Later in 2007 these localized signs of distress turned into a global event, with losses spreading to banks in Europe (such as U.K. mortgage lender Northern Rock), and distress was no longer limited to financial institutions with exposure to the U.S. subprime mortgage market.

To alleviate liquidity shortages, the U.S. Federal Reserve reduced the penalty to banks for accessing its discount window, and later that year created the Term Auction Facility. Similarly, a blanket guarantee was issued in the United Kingdom for Northern Rock’s existing deposits. 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. By the end of 2007, many economies around the world suffered from a collapse in international trade, reversals in capital flows, and sizable contractions in real output. However, 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.

Although some aspects of this crisis appeared to be new, such as the role of asset securitization in spreading risks across the financial system, it broadly resembled earlier boom-bust episodes, many of which followed periods of financial liberalization. One common factor among these crises is a substantial rise in private sector indebtedness; infected sectors in addition to banks were the household sector (as in the U.S. crisis in 2007–09 and the Nordic crises of the 1990s), the corporate sector (as in the case of the 1997–98 East Asian financial crisis), or both. As in earlier crisis episodes, asset prices rose sharply while banks decreased reliance on deposits in favor of less stable sources of wholesale funding, and while nonbanking institutions (for instance, finance companies in Thailand in the 1990s, and offshore financial institutions in Latin America in the 1980s and 1990s) grew significantly owing in part to less stringent prudential requirements for nonbanks.

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. These broad patterns repeated themselves in the 2007–09 crises when losses in the U.S. real estate market triggered general runs on the U.S. shadow banking system, which ultimately hit banks in the United States and elsewhere.

Which Countries had Systemic Banking Crises in 2007–09?

The financial crisis that started in the United States in 2007 spread around the world, affecting banking systems in many other countries. This section defines a systemic banking crisis and identifies which countries experienced one. It also identifies countries that can be considered to have experienced borderline banking crises, and countries that escaped banking crises altogether (either because they staved off a crisis through successful policies or because they were not hit by the negative shock emanating from the United States).

A banking crisis is considered to be systemic if two conditions are met:

  • Significant signs of financial distress are exhibited by the banking system (as indicated by significant bank runs, losses in the banking system, and bank liquidations).

  • Significant banking policy intervention measures are taken in response to significant losses in the banking system.

The first year that both criteria are met is taken to be the starting year of the banking crisis. Policy interventions in the banking sector are considered to be significant if at least three out of the following six measures were used:2

Extensive liquidity support (5 percent of deposits and liabilities to nonresidents). In implementing this definition of systemic interventions, liquidity support is considered to be extensive when the ratio of central bank claims on the financial sector to deposits and foreign liabilities exceeds 5 percent and more than doubles relative to its precrisis level.3

Bank-restructuring costs (at least 3 percent of GDP). Direct bank-restructuring costs are defined as the component of gross fiscal outlays directed to restructuring the financial sector, such as recapitalization costs. They exclude asset purchases and direct liquidity assistance from the treasury. Direct restructuring costs are defined to be significant if they exceed 3 percent of GDP.

Significant bank nationalizations. Significant nationalizations are takeovers by the government of systemically important financial institutions and include instances in which the government takes a majority stake in the capital of such institutions.

Significant guarantees put in place. A significant guarantee on bank liabilities indicates that either a full protection of liabilities has been issued or that guarantees have been extended to nondeposit liabilities of banks.4 Simply raising the level of deposit insurance coverage is not deemed significant.

Significant asset purchases (at least 5 percent of GDP). Asset purchases from financial institutions include those implemented through the treasury or the central bank. Significant asset purchases are those exceeding 5 percent of GDP.5

Deposit freezes and bank holidays. Includes the suspension of banking activities for a short period. It can be accompanied by the conversion to a longer-than-contracted maturity of existing deposits in the banking system, or simply the suspension of redemptions for a specified period.

In the past, some countries intervened in their financial sectors using a combination of fewer than three of these measures but on a large scale (for example, by nationalizing all major banks in the country). Therefore, a sufficient condition for a crisis episode to be deemed systemic occurs when either (1) 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 (2) fiscal restructuring costs of the banking sector exceed 5 percent of GDP.6 For the 2007–09 wave of crises, none of these additional criteria are needed to identify systemic events.

Quantitative thresholds to implement this definition of a systemic banking crisis are admittedly arbitrary; therefore, an additional list is maintained of borderline cases that almost meet this definition of a systemic crisis. At the same time, the more quantitative approach is a major improvement over earlier efforts to date banking crises (such as Caprio and others, 2005; Laeven and Valencia, 2008; and Reinhart and Rogoff, 2009), which relied on qualitative approaches to determining banking crises, defining them as situations in which a large fraction of banking system capital has been depleted.

Table 13.1 provides a list of countries that met this chapter’s definition during the 2007–09 episode. The exact criteria that are met are also indicated. A separate column on deposit freezes and bank holidays is not included because no episode during this wave of banking crises made use of banking holidays, while deposit freezes were used only for Parex bank in Latvia. In total, 13 systemic banking crises and 10 borderline cases are identified as having occurred since 2007.7Table 13A.1 in the appendix presents more detailed information about the policy interventions in these cases.

Table 13.1Systemic Banking Crises, 2007–09
CountryExtensive liquidity supportSignificant restructuring costsSignificant asset purchasesSignificant guarantees on liabilitiesSignificant nationalizations
Systemic Cases
Austria
Belgium
Denmark
Germany
Iceland
Ireland
Latvia
Luxembourg
Mongolia
Netherlands
Ukraine
United Kingdom
United States
Borderline Cases
France
Greece
Hungary
Kazakhstan
Portugal
Russian Fed.
Slovenia
Spain
Sweden
Switzerland
Source: Authors’ calculations.
Source: Authors’ calculations.

As in Chapter 2, the starting year of the banking crises in the United Kingdom and the United States is 2007; for all other cases in the 2007–09 wave the starting date is 2008.8

Most policy packages announced in countries that do not meet the definition can be seen as preemptive interventions. In a large subset of Group of 20 (G-20) countries, direct policies to support the financial sector were quite modest. For instance, Argentina, Brazil, China, India, Indonesia, Mexico, Saudi Arabia, South Africa, and Turkey did not announce direct financial sector support measures that involved fiscal outlays. Some issued or increased guarantees on bank liabilities, creating contingent liabilities for the government. For example, Mexico announced a guarantee on commercial paper up to a limit of 50 billion pesos. Other G-20 countries were more seriously affected by the financial turmoil and reacted more strongly, but ultimately did not intervene at a large enough scale for the crises to be deemed systemic. Appendix Table 13A.2 provides more details about these cases, including the actual use of policy measures. The differences between announced and actually used amounts are striking in a number of cases, with the actual usage of announced packages on average being small.9

Chapter 2 includes only the first year of the crisis but does not report an end date for the crisis episode. In this chapter, we expand the database by dating the end of each episode as the year before two conditions hold: real GDP growth and real credit growth are positive for at least two consecutive years. If real GDP and real credit grow in the first two years, the crisis is dated to end the same year it starts.10 Admittedly, this is an oversimplification given the many factors that come into play in a crisis, and the differences in crises and recoveries across the sample. In a number of cases this methodology results in long crisis durations, which sometimes are the consequence of additional shocks affecting the economic performance of the countries. To keep the rule simple, duration is truncated at five years, beginning with the crisis year. As of end-2009, none of the 2007–09 crises had ended according to the definition used in this chapter. The median duration of a crisis for the old episodes is two years. Start and end dates for all episodes are reported in Table 13.2, which also reports output losses (defined in the next section).

Table 13.2Banking Crisis Start and End Dates
CountryStartEndOutput

loss

(percent)
Albania119941994
Algeria19901994341
Argentina19801982458
Argentina1989199113
Argentina2199519950
Argentina2001200371
Armenia1199419944
Austria200817
Azerbaijan1199519954
Bangladesh198719870
Belarus119951995
Belgium200823
Benin19881992315
Bolivia1986198649
Bolivia199419940
Bosnia and Herzegovina1199219963
Brazil219901994362
Brazil199419980
Bulgaria1996199760
Burkina Faso19901994
Burundi199419983121
Cameroon198719913106
Cameroon199519978
Cape Verde199319930
Central African Rep.197619760
Central African Rep.199519969
Chad198319830
Chad1992199630
Chile1976197620
Chile1981198539
China1998199819
Colombia1982198247
Colombia1998200043
Congo, Dem. Rep.198319831
Congo, Dem. Rep.199119943130
Congo, Dem. Rep.19941998379
Congo, Rep.1992199447
Costa Rica198719910
Costa Rica199419950
Côte d’Ivoire19881992345
Croatia119981999
Czech Republic1,2199620003
Denmark200836
Djibouti19911995343
Dominican Rep.20032004
Ecuador19821986398
Ecuador1998200225
Egypt198019801
El Salvador198919900
Equatorial Guinea1983198340
Eritrea199319934
Estonia119921994
Finland1991199570
France2200821
Georgia1199119953
Germany200819
Ghana1982198345
Greece2200829
Guinea1985198540
Guinea199319930
Guinea-Bissau1995199830
Guyana199319930
Haiti1994199838
Hungary11991199530
Hungary2200842
Iceland200842
India199319930
Indonesia19972001369
Ireland2008110
Israel1977197776
Jamaica1996199838
Japan19972001345
Jordan19891991106
Kazakhstan220080
Kenya1985198524
Kenya1992199450
Korea, Rep.1997199858
Kuwait19821985143
Kyrgyz Rep.1199519993
Latvia119951996
Latvia2008116
Lebanon19901993102
Liberia199119953
Lithuania119951996
Luxembourg200847
Macedonia, FYR1199319950
Madagascar198819880
Malaysia1997199931
Mali1987199130
Mauritania198419848
Mexico19811985327
Mexico1994199614
Mongolia20080
Morocco19801984322
Mozambique1987199130
Nepal198819880
Netherlands200825
Nicaragua1990199311
Nicaragua200020010
Niger1983198597
Nigeria1991199530
Norway199119935
Panama1988198985
Paraguay1995199515
Peru19831983455
Philippines1983198692
Philippines21997200130
Poland1199219940
Portugal2200837
Romania11990199240
Russian Fed.1199819984
Russian Fed.220080
São Tomé & Príncipe1992199242
Senegal198819916
Sierra Leone19901994334
Slovak Rep.19981200230
Slovenia119921992
Slovenia2200837
Spain19771981359
Spain2200839
Sri Lanka1989199120
Swaziland19951999346
Sweden1991199533
Sweden2200831
Switzerland220080
Tanzania198719880
Thailand1983198325
Thailand19972000109
Togo1993199439
Tunisia199119911
Turkey1982198435
Turkey2000200137
Uganda199419940
Ukraine1199819990
Ukraine20085
United Kingdom200724
United States2198819880
United States200725
Uruguay19811985338
Uruguay2002200527
Venezuela1994199831
Vietnam199719970
Yemen1996199616
Zambia1995199831
Zimbabwe19951999310
Sources: IMF World Economic Outlook;Laeven and Valencia (2008); and authors’ calculations.Note: Output losses are computed as the cumulative difference between actual and trend real GDP, expressed as a percentage of trend real GDP for the period t through t + 3, where t is the starting year of the crisis. Trend real GDP is computed by applying a Hodrick-Prescott filter (λ = 100) to the GDP series over t – 20 through t – 1.

No output losses are reported for crises in transition economies that took place during the period of transition to market economies.

Borderline cases.

The duration of crises is truncated at five years, starting with the first crisis year.

Credit data missing. For these countries, end dates are based on GDP growth only.

Sources: IMF World Economic Outlook;Laeven and Valencia (2008); and authors’ calculations.Note: Output losses are computed as the cumulative difference between actual and trend real GDP, expressed as a percentage of trend real GDP for the period t through t + 3, where t is the starting year of the crisis. Trend real GDP is computed by applying a Hodrick-Prescott filter (λ = 100) to the GDP series over t – 20 through t – 1.

No output losses are reported for crises in transition economies that took place during the period of transition to market economies.

Borderline cases.

The duration of crises is truncated at five years, starting with the first crisis year.

Credit data missing. For these countries, end dates are based on GDP growth only.

Policy Responses in the 2007–09 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. This containment phase is followed by a resolution phase during which a broad range of measures (such as capital injections, asset purchases, and guarantees) are typically taken to restructure banks and reignite economic growth. It is intrinsically difficult to compare the success of crisis resolution policies given differences across countries and time and 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. With this caveat, policy responses during the 2007–09 crisis episode are now compared with those of the past.

The policy responses during the 2007–09 crisis episodes were broadly similar to those used in the past. First, liquidity pressures were contained through liquidity support and guarantees on bank liabilities. Like the crises of the past, during which bank holidays and deposit freezes were rarely used as containment policies, no records show the use of bank holidays during the 2007–09 wave of crises, and a deposit freeze was used only in Latvia for deposits in Parex Bank. On the resolution side, a wide array of instruments were used for the 2007–09 crises, including asset purchases, asset guarantees, and equity injections. All these measures were used in the past, but this time they seem to have been put in place more quickly.11

One commonality among the 2007–09 banking crises is that they mostly affected advanced economies with large, internationally integrated financial institutions that were deemed too large or interconnected to fail. The large international networks and cross-border exposures of these financial institutions helped propagate the crisis to other countries. Failure of any of these large financial institutions could have resulted in the failure of other systemically important institutions, either directly by imposing large losses through counterparty exposures or indirectly by causing a panic that could generate bank runs. These exposures prompted large-scale government interventions in the financial sector (including preemptive measures in some countries).

Given that the crisis started in U.S. subprime mortgage market, financial exposure to the United States was a key propagation mechanism of the crisis (Claessens and others, 2010). Figure 13.1 shows foreign claims by nationality of reporting banks, from the Bank for International Settlements’ consolidated banking statistics, expressed as percentages of home-country GDP, as of end-2006. Cross-border banking exposure to the United States varied a great deal across countries, ranging from less than 1 percent of GDP for Mexico to 300 percent of GDP for Switzerland. Eight out of ten of the most exposed economies meet the definition of systemic banking crises or are categorized as borderline cases.

Figure 13.1Foreign Claims on the United States by Nationality of Reporting Banks, end–2006

Source: Bank for International Settlements.

Liquidity support was used intensively as a first response to this shock emanating from the United States. Not only was liquidity provision large, as illustrated in Figure 13.2, but it was also made available more broadly through a larger set of instruments and institutions (including nonbank institutions), and under weaker collateral requirements. Examples of unconventional liquidity measures include the U.S. Federal Reserve’s decision to grant primary broker-dealers access to the discount window, the widening of collateral accepted by the Federal Reserve and many other central banks, and the purchase of asset-backed securities by the Federal Reserve. These actions were also accompanied in some cases by the introduction of nonconventional facilities to fund nonfinancial companies directly, such as the Federal Reserve’s Commercial Paper Facility and the Bank of England’s Asset Purchase Facility.

Figure 13.2Emergency Central Bank Liquidity Support, 2007–09

Sources: Laeven and Valencia, 2008; IMF, International Financial Statistics; and authors’ calculations.

Note: Total height of each bar represents the ratio of direct liquidity support from the treasury to total deposits and foreign liabilities (2007–09). Shaded portion of each bar represents the change in the ratio of central bank claims on the financial sector to total deposits and liabilities from the year before the crisis to the peak in the ratio. Liquidity data for Iceland were available only through March 2008.

This significant liquidity provision is reflected in a large increase in central bank claims on the financial sector. The median change from the precrisis level to its peak in the ratio of central bank claims on the financial sector to deposits and foreign liabilities amounts to 5.5 percent.12 This is about half its median in past crisis episodes. For comparison purposes, Figure 13.2 also reports the historical median of liquidity support among high-income countries given that most of the 2007–09 crises occurred in high-income economies (with the exceptions of Latvia, Mongolia, and Ukraine).13

In some cases, liquidity was also provided directly by the treasury, as indicated in Figure 13.2. Slovenia shows the largest increase in liquidity funded by the treasury, amounting to close to 5 percent of deposits and foreign liabilities. Similarly, government deposits at Parex Bank in Latvia were an important source of liquidity assistance for this bank.14 Liquidity injected in countries labeled as borderline was also significant, particularly for Greece, Russia, and Sweden. For Greece, liquidity support increased steadily starting in September 2009. In Russia, liquidity support subsided quickly after reaching a peak of 22 percent of deposits and foreign liabilities in 2009.

Guarantees on bank liabilities were also widely used during the 2007–09 crisis episodes to restore the confidence of bank liability holders. All crisis countries except Ukraine (and Kazakhstan, Sweden, and Switzerland among borderline cases) extended guarantees on bank liabilities other than raising deposit insurance limits. However, the coverage extended varied widely (Appendix Table 13A.1). Although guarantees on bank liabilities were not uncommon in past crises, asset guarantees were used less frequently in the past. In the 2007–09 crises, asset guarantees were used in some cases, including in Belgium and the United Kingdom. For instance, the Bad Bank Act in Germany, passed in July 2009, provided private banks relief on holdings of illiquid assets by allowing them to transfer assets to a special entity in exchange for government-guaranteed bonds issued by this entity. Although direct fiscal costs for Germany amounted to slightly more than 1 percent of GDP, total guarantees (including those associated with bad bank and financial institutions’ debt) reached about 6 percent of GDP.15

One measure of the length of a crisis is the time it takes central banks to withdraw liquidity support. As a measure of the time it took to withdraw liquidity support, the number of months between the peak of liquidity support and the month when liquidity support declined to its precrisis level is computed. In earlier crises, emergency liquidity support was withdrawn within 14 months (median). However, this time, as of end-2009 only Denmark, Germany, Hungary, Luxembourg, the Netherlands, and Switzerland saw their liquidity support return to precrisis levels, suggesting that liquidity remained an issue for a prolonged time in the 2007–09 crises.

The overall size of monetary expansion is also considered by computing the change in the monetary base; monetary expansion is found to be significantly higher in the 2007–09 crises compared with past crises. Figure 13.3 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.16 The median monetary expansion of about 6 percent in the 2007–09 crises significantly exceeds its historical median of about 1 percent, although it is not that different from its historical median among high-income countries. Relatively larger financial systems and credibility of monetary policy in high-income economies may explain this difference.

Figure 13.3Monetary Expansion, 2007–09

Sources: IMF, International Financial Statistics; Laeven and Valencia (2008); and authors’ calculations.

About 70 percent of fiscal outlays correspond to public sector recapitalizations of financial institutions. Bank recapitalizations, although not more common than in earlier crisis episodes, were implemented much faster than in the past. 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 2007–09 crises compared with 12 months for past crises (Figure 13.4).17 Addressing solvency problems with public money is generally a complex and lengthy process because it requires political consensus and legislation. Policymakers, therefore, often prolong the use of liquidity support and guarantees in the hope that problems in the banking sector subside. With the 2007–09 crises, though, policymakers acted with relative speed, at least in some countries.18

Figure 13.4Timing of Recapitalization Policies for Countries with Systemic Banking Crises, 2007–09

Sources: Laeven and Valencia (2008); and authors’ calculations.

Governments typically acquire stakes in the banking sector as part of government recapitalization programs, and such ownership stakes often end up being held by the government for a prolonged period. 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 Troubled Asset Relief Program capital support endeavor witnessed in the United States are not uncommon, government participation in banks has, in many cases, largely exceeded the initially envisioned holding period.19 In many cases, the public sector retained participation for more than 10 years (in Japan, for instance, as of end-2008 over 30 percent of capital injected in financial institutions following the crisis in 1997 remained to be sold). 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.

Bank failures—defined broadly by including institutions that received government assistance—were also significant during the 2007–09 wave of crises. This proportion of failures 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. Relative to the total assets in the banking system, the bank failures in Iceland were by far the most significant, at about 90 percent of total banking assets (Figure 13.5). In Belgium and Greece as well as Iceland, banks that failed or received government assistance represented 80 percent or more of banking system assets. When using the more conservative definition of failure that excludes government assistance, Iceland is followed by Belgium, Kazakhstan, and the United Kingdom, with failing banks representing 53 percent, 28 percent, and 26 percent, respectively, of the system. With banks holding 80 percent of total banking system assets receiving some form of government assistance, Greece topped the charts. Greece is followed by France and Ireland, with banks holding about 70 percent and 55 percent, respectively, of banking system assets receiving government assistance.

Figure 13.5Bank Failures and Interventions in Selected Countries, August 2007–August 2009

Source: Authors’ calculations based on data from IMF International Financial Statistics, European Union, U.S. Federal Deposit Insurance Corporation, and the Deposit Insurance Corporation of Japan.

Note: Government-assisted banks means public capital support resulting in the government holding a minority stake in the bank. Failed banks mean bank closure, bank taken over by government, nationalization, or public capital support resulting in the government becoming a majority shareholder.

For the United States, for which historical data on bank failures since the 1930s are available, the recent failures that included assistance are unprecedented, with banks holding about one-quarter of the deposit market having failed or received some of form of government assistance since 2007. (See Box 13.1 for a more detailed analysis of historical U.S. bank failures.) Excluding banks that received public assistance, 1989 is by far the worst year on record, with banks holding more than 6 percent of the deposit market failing during the U.S. savings and loan crisis. The United States was clearly not an outlier during the 2007–09 crises, even when using the broader definition of bank failures that includes government assistance. Of course, the U.S. failure list excludes such large financial institutions as Fannie Mae, Freddie Mac, and AIG because they are not banks, although they meet this chapter’s definition of failure; therefore, this analysis could be underestimating the magnitude of financial distress in the United States.

Box 13.1U.S. Bank Failures: Past and Present

U.S. bank failures since the 1930s have come in three waves: the Great Depression era of the 1930s, the savings and loan crisis of the 1980s, and the mortgage crisis late in the first decade of the 2000s, with the number of bank failures peaking in the years 1937, 1989, and 2009, respectively. Compared with the earlier bank failure episodes, the 2007–09 wave of bank failures appears more short lived and, at least compared with the savings and loan crisis, less dramatic as measured by the number of failing banks (Figure 13.1.1). Note that 2005 and 2006 were the only years since 1934 that reported no bank failures.

Figure 13.1.1U.S. Bank Failures: Fraction of Failed Banks, 1934–2010

Owing in part to consolidation following financial deregulation starting in the 1980s, the average U.S. bank grew substantially. After accounting for this development, the recent failures look much worse. Failed U.S. banks during the 2007–09 crisis held about 26 percent of the deposit market—that is, when including banks that did not fail but received government assistance, such as Citigroup and Bank of America (Figure 13.1.2). Using this definition of failure, 2009 is by far the worst on record. When excluding banks that received public assistance, 1989 is the worst year on record.

Figure 13.1.2U.S. Bank Failures: Market Share of Failed Banks, 1934–2010

Source: U.S. Federal Deposit Insurance Corporation.

Note: The data include all failures and assistance transactions across 50 U.S. states and the District of Columbia.

Bank failures during 2007–09 generated similar losses compared with the past, with a median loss rate to the deposit insurance fund on assets of failed banking institutions of 19 percent (Figure 13.1.3). Median losses are relatively stable over the examined period (data on loss rates are available starting in 1986), and roughly the same during the 2007–09 crisis as compared with the savings and loan crisis. The median loss rate peaked in 2008 at 28 percent. Losses to the deposit insurer were significantly lower in 2008, at 0.12 percent of U.S. GDP, than the highest loss on record in 1989 of 0.97 percent of U.S. GDP. Overall, in the particular case of the United States, the failure rate of banks and losses incurred by the government in closing failed banks in the 2007–09 crises were similar to the U.S. banking crisis of the 1980s, with a median loss rate in bank failures of about 20 percent of bank assets.

Figure 13.1.3U.S. Bank Failures: Loss Rates on Assets of Failed Banks, 1986–2008

Source: U.S. Federal Deposit Corporation.

Note: Includes all failures and assistance transactions across 50 U.S. states and the District of Columbia. Total assets are for FDIC-insured commercial banks only. The estimated loss is the difference between the amount disbursed from the Deposit Insurance Fund (DIF) to cover obligations to insured depositors and the amount estimated to be ultimately recovered from the liquidation of the receivership estate. 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 reorganization of the world’s financial map, with large players becoming significantly smaller, freeing up space for new players, particularly in emerging markets. Bank failures during the 2007–09 wave of crises were particularly dramatic for the United States and some of the countries in Western Europe that, before the crisis, were top-tier players in global banking. Before the crisis, at end-2006, the top 30 banks worldwide had a total stock market capitalization of about US$3.4 trillion, of which 40 percent belonged to U.S. banks, 12 percent to U.K. banks, and 12 percent to Japanese banks (see Table 13.3).20 Countries with systemic banking crises in 2007–09 dominated the banking arena in 2006 with a share of close to 60 percent of the total.

Table 13.3Market Capitalization of Top 30 Banks Worldwide, by Nationality
Number of banksPercent of market capitalization
CountryEnd-2006End-2009End-2006End-2009
United States10539.820.9
United Kingdom4312.513.9
France337.88.8
Japan3111.92.5
Netherlands and Belgium1306.90.0
Spain226.59.5
Switzerland227.54.9
Canada121.85.0
Italy122.95.1
Germany112.42.1
Australia040.08.8
Brazil020.04.4
China020.012.2
Sweden010.01.9
Total3030100.0100.0
Source: Bankscope.Note: Banks used in the calculation are listed in Appendix Table 13A.4.

Includes two Dutch institutions and Fortis, a Dutch-Belgian financial conglomerate.

Source: Bankscope.Note: Banks used in the calculation are listed in Appendix Table 13A.4.

Includes two Dutch institutions and Fortis, a Dutch-Belgian financial conglomerate.

The crisis changed the map significantly. Twelve banks dropped from the top-30 list of 2006, of which three were acquired by other institutions. The overall loss in market capitalization of the top-30 banks between 2006 and 2009 was a staggering 52 percent, a figure that even includes a significant stock market recovery during 2009. Excluding banks that were acquired by other institutions, Citigroup had the largest decline in market capitalization; however, at the country level, the Netherlands (including Fortis Bank) experienced the largest average decline, followed by Japan. The latter is surprising given that Japan is not even classified as having had a borderline systemic banking crisis (because, although announced policy interventions in Japan were significant, the actual use of these resources was small).

What did the list of the world’s top-30 banks look like at the end of 2009? Four countries were on the list for the first time: Australia, Brazil, China, and Sweden. The Netherlands and Belgium—listed together in Table 13.3 because of jointly owned Fortis Bank—dropped from the top-30 ranking in 2009. The number of U.S. banks on the list fell to five, together holding only 21 percent of the market capitalization of the world’s 30 largest banks compared with 40 percent for the 10 U.S. banks on the list in 2006. The United States clearly had the most dramatic change in market capitalization share. Other clear losers included the Netherlands and Japan. In 2006, no emerging market appeared on the list, but at end-2009 banks from Brazil and China together were holding 16 percent of the total market capitalization of top-30 banks worldwide. Other clear winners were Australia and Canada, whose large banks mostly escaped entanglement in the U.S. mortgage crisis.

How Costly Were the 2007–09 Systemic Banking Crises?

The cost of each crisis is estimated using three metrics: direct fiscal costs, output losses, and the increase in public sector debt relative to GDP. Direct fiscal costs include fiscal outlays committed to the financial sector from the start of the crisis through end-2009 (see Appendix Table 13A.3 for a list of items included), and capture the direct fiscal implications of intervention in the financial sector.21 Output losses are computed as deviations of actual GDP from its trend, and the increase in public debt is measured as the change in the public-debt-to-GDP ratio during the four-year period beginning with the crisis year.22 Output losses and the increase in public debt capture the overall real and fiscal implications of the crisis.

The 2007–09 crises were overall more costly in output losses and increases in debt, but less so in direct fiscal outlays compared with the average crisis of the past. However, when the comparison is limited to high-income countries—given that they dominate the new crises sample—output losses are found to be similar to those of the past, increases in public debt are somewhat lower, but direct fiscal outlays are higher (Table 13.4).

Table 13.4Summary of the Cost of Banking Crises, 1970–2009
Direct fiscal costIncrease in public debtOutput losses
Median (% of GDP)
Previous crises (1970–2006)
Advanced economies3.736.232.9
Emerging markets11.512.729.4
All10.016.319.5
Most recent crises (2007–09)
Advanced economies5.925.124.8
Other economies4.823.94.7
All4.923.924.5
Sources: Laeven and Valencia (2008); and authors’ calculations.Note: The 2007–09 crises comprise Austria, Belgium, Denmark, Germany, Iceland, Ireland, Latvia, Luxembourg, Mongolia, the Netherlands, Ukraine, the United Kingdom, and the United States.
Sources: Laeven and Valencia (2008); and authors’ calculations.Note: The 2007–09 crises comprise Austria, Belgium, Denmark, Germany, Iceland, Ireland, Latvia, Luxembourg, Mongolia, the Netherlands, Ukraine, the United Kingdom, and the United States.

The median direct fiscal costs associated with financial sector restructuring for the 2007–09 systemic banking crises amounted to almost 5 percent of GDP, about half its historical median of 10 percent. Figure 13.6 illustrates the direct fiscal costs for the 2007–09 systemic crises, as well as for the borderline cases. Greece, Kazakhstan, Russia, and Slovenia show the highest costs among the borderline cases, although for Slovenia all costs correspond to liquidity support from the treasury in the form of bank deposits. For Greece and Kazakhstan, at least half is also liquidity assistance from the treasury. For Russia, the entire amount corresponds to recapitalization. As one would expect, on average, direct fiscal costs for borderline cases are lower than those for the systemic crises. Iceland has the highest fiscal outlays, at 13 percent of GDP.23

Figure 13.6Direct Fiscal Costs, 2007–09

Sources: Laeven and Valencia (2008); and authors’ calculations.

The lower direct fiscal outlays associated with high-income countries in past crises, relative to all past crises, is regarded as a consequence of the greater flexibility these countries have in supporting their financial systems indirectly through expansionary monetary and fiscal policy and direct purchases of assets that help sustain asset prices. Additionally, some high-income countries opted for sizable contingent liabilities to complement direct fiscal outlays (see Appendix Table 13A.3).

Given that countries can also indirectly support their financial sectors in times of crisis through expansionary fiscal policies that support output and employment, the overall increase in public debt can be used as a broader estimate of the fiscal cost of the crisis. The median debt increase among 2007–09 crises was 24 percent of GDP, about 8 percentage points higher than its historical median of 16 percent. Thus, public debt burdens increased significantly as a consequence of policy measures taken during the crisis.

Figure 13.7 shows the increase in the public debt burden for each crisis country and also reports the historical median of the increase in public debt at crisis times. The increase in public debt that can be attributed to the crisis is approximated by computing the difference between pre- and postcrisis debt projections. For the 2007–09 crises, the fall WEO debt projections from the year before the crisis year are used as precrisis debt figures (i.e., September 2006 WEO for the United Kingdom and the United States and October 2007 WEO for all other 2007–09 crises) and the spring 2010 WEO debt projections for the postcrisis debt figures. For past episodes, the actual change in debt is reported.24

Figure 13.7Estimated Increase in Public Debt, 2007–11

Sources: Authors’ calculations; IMF, World Economic Outlook, various years; and Laeven and Valencia (2008).

Among the 2007–09 borderline cases, France, Greece, Portugal, and Spain exhibited the largest expected increases in debt. Although overall fiscal stimulus packages to counteract the global recession were significant in some of these countries, the direct interventions in the financial sector were not sufficient—as of end-2009—to qualify as systemic banking crises.

Figures 13.6 and 13.7 suggest a large difference between increases in fiscal costs arising from direct support to the financial sector and increases in overall public debt. This difference appears to be positively correlated at about 0.4 with an economy’s level of income (Figure 13.8). 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 reflects, in part, the outcome of measures taken to support the real sector. This difference can be partly explained by discretionary fiscal policy and automatic stabilizers. One possible interpretation of this positive correlation is that high-income economies generally face easier financing opportunities than their low-income counterparts, and therefore may choose to complement financial measures with expansionary fiscal measures to deal with banking crises. 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.

Figure 13.8Increase in Public Debt and Direct Fiscal Costs

Sources: Authors’ calculations; IMF, World Economic Outlook; and Laeven and Valencia (2008).

Note: Previous episodes exclude countries that experienced sovereign debt crises, using data from Laeven and Valencia (2008).

The fallout from the 2007–09 crises on the real sector was large. The median output loss is estimated to be 25 percent of GDP, which is almost 5 percentage points higher than the historical median loss during previous crises of 20 percent. Output losses are estimated by computing the difference between trend GDP and actual GDP for the four-year period beginning with the crisis year.25 Therefore, the methodology does not distinguish between permanent and transitory output losses. For the 2007–09 crises, spring 2010 WEO projections are used as actual GDP for the postcrisis years. Figure 13.9 shows the results.26

Figure 13.9Output Losses

Sources: Laeven and Valencia (2008); IMF, World Economic Outlook, various years; and authors’ calculations.

Output losses differ depending on the size of the initial shock, differences across countries in how the shock was propagated through the financial system, and the intensity of policy interventions. The output losses for Ireland and Latvia stand out at more than 100 percent of potential GDP. Losses among borderline cases are also significant, in particular for Hungary, Portugal, and Spain. On average, countries with larger financial systems, and especially those that experienced rapid expansion before the crisis (such as Iceland, Ireland, and Latvia), were hit hardest.

Conclusion

This chapter extends the database presented in Chapter 2 on systemic banking crises through end-2009 to include the 2007–09 wave of financial crises following the U.S. mortgage crisis of 2007. The update results in 13 new systemic banking crisis episodes and 10 borderline cases since early 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 broader coverage of crisis management policies.

The new data show that the 2007–09 crises and past crises share many commonalities, both in underlying causes and in policy responses. All crises share a containment phase during which liquidity pressures are kept in check through liquidity support and in some cases guarantees on bank liabilities. This phase is followed by a resolution phase during which a broad range of measures are taken to restructure banks and encourage bank lending (including asset purchases, guarantees, and capital injections) to reignite economic growth. These common patterns echo earlier findings summarized in Honohan and Laeven (2005) and Reinhart and Rogoff (2009).

However, the 2007–09 wave of crises also shows some important differences from previous crisis episodes.

  • First, the 2007–09 crises were concentrated in advanced economies, in particular those with large and integrated financial systems, unlike many of the boom-bust cycles of the past that centered on emerging market economies. Liquidity shortages at systemically important, globally interconnected financial institutions in these advanced economies prompted large-scale government interventions.

  • Second, although the intensity of policy interventions was comparable to past crisis episodes, the speed of intervention and implementation of resolution policies was faster for the 2007–09 crises. This timely response reflects, in part, that most of the crisis-affected countries were high-income countries with strong legal, political, and economic institutions that created an enabling environment for effective and speedy crisis resolutions. Recapitalization policies, in particular, were implemented much sooner than in the past, contributing to lower direct fiscal outlays.

  • Third, countries used a much broader range of policy measures compared with past episodes, including unconventional monetary policy measures, asset purchases and guarantees, and significant fiscal stimulus packages. These large-scale public interventions were possible in part because most of the crisis-affected countries were high-income countries with relatively greater institutional quality and credibility of policy actions.

  • Fourth, preliminary estimates indicate that the overall economic costs of the 2007–09 crises are higher in output losses and increases in public debt compared with past crises, although fiscal costs associated with financial sector interventions were lower this time.

Appendix Table 13A.1Systemic Banking Crisis Policy Responses, 2007–09
CountryLiquidity support (percentage point increase in central bank claims on financial institutions as a ratio of deposits and foreign liabilities)Gross restructuring costs (recapitalization and other restructuring costs, excluding liquidity and asset purchases, as a percentage of GDP)Asset purchases and guarantees (funded by treasury and central bank, as a percentage of GDP)Guarantees on liabilities (significant guarantees on bank liabilities in addition to increasing deposit insurance ceilings)Nationalizations (state takes control of institutions; year of nationalization in parentheses)
Systemic Crises
Austria8.22.1Guarantees: 0.6Unlimited coverage to depositors. Bank and nonbank bond issues.Hypo Group Alpe Adria (2009)
Belgium14.05.0Guarantees: 7.7DI raised from €20,000 to €100,000. Deposit-like insurance instruments. Interbank loans and short-term debt. Specific guarantees on Dexia.Fortis (2008)
Denmark10.52.8n.a.Deposits and unsecured claims of Private Contingency Association banks.Fionia Bank (2009)
Germany2.81.2Purchases: 0.2Unlimited coverage of household deposits. Interbank loans and bank debt (capped at €400 billion).Hypo Real Estate (2008)
Iceland2.413.0n.a.Unlimited coverage of domestic deposits.Kaupthing, Landsbanki, Glitnir, Straumur-Burdaras, SPRON, and Sparisjódabankinn (2008)
Ireland13.37.6n.a.Unlimited coverage until September 29, 2010 of most liabilities of 10 banks.Anglo Irish Bank (2009)
Latvia3.32.5n.a.DI raised to €50,000. Guarantee on Parex Bank syndicated loans.Parex Bank (2008)
Luxembourg4.37.7n.a.DI raised from €20,000 to €100,000. €4.5 billion guarantee on Dexia Bank’s debt.Fortis and Dexia’s subsidiaries (2008)
Mongolia9.43.0n.a.Unlimited coverage of all deposits.Zoos Bank (2009)
Netherlands3.36.5Guarantees: 3.3DI raised to €100,000. Interbank loans to solvent banks. Fortis bonds (€5 billion) and ING bonds (€10 billion).ABN-AMRO/Fortis (2008)
Ukraine14.64.8n.a.DI raised from 50,000 hryvnia to 150,000 until January, 2011Prominvest (2008); Nadra, Inprom, Volodimrski, Dialog, Rodovid, Kiev, Ukrgaz (2009)
United Kingdom5.55.1Purchases: 13.4 Guarantees: 14.5DI raised from £35,000 to 50,000. Guarantee on short-to medium-term debt (capped at £250 billion).Northern Rock, RBS (2008)
Blanket guarantee on Northern Rock and Bradford & Bingley wholesale deposits.
United States4.63.5Purchases: 9.0DI raised from $100,000 to $250,000 (until end-2009). Money market funds (capped at $50 billion). Full guarantee on transaction deposits. Newly issued senior unsecured debt.Fannie Mae, Freddie Mac, AIG (2008)
Borderline Cases
France6.4n.a.n.a.DI already higher than new European Union limit. €360 billion in guarantees for refinancing credit institutions. €55 billion of Dexia’s debt.n.a.
Greece18.31.7n.a.DI raised from €20,000 to €100,000. Funding guarantees up to €15 billion.n.a.
Hungary1.30.1n.a.Unlimited protection to depositors of small banks.n.a.
Kazakhstan4.62.4n.a.DI raised from 0.7 million tenge to 5 million.n.a.
Portugal5.5n.a.n.a.DI raised from €25,000 to €100,000. Debt securities issued by credit institutions (up to 12 percent of GDP).Banco Portugues de Negócios (small bank) (2008)
Russian Federation22.21.0n.a.DI raised from 400,000 rubles to 700,000. Interbank lending for qualifying banks.n.a.
Slovenia9.3n.a.n.a.Unlimited protection for all deposits by individuals and small enterprises until end-2010. New debt issued by financial institutions until end-2010.n.a.
Spain4.1n.a.n.a.DI raised from €20,000 to €100,000. Credit institutions’ new debt issues (capped at €200 billion).n.a.
Sweden13.10.7n.a.DI raised from 250,000 kronor to 500,000. Medium-term debt of banks and mortgage institutions (up to 1.5 trillion kronor).n.a.
Switzerland2.81.1Purchases: 6.7DI raised from 30,000 francs to 100,000 until December 31, 2011.n.a.
Sources: IMF staff reports; Mayer Brown (2009); official websites; and IMF, International Financial Statistics.Note: — = not available; DI = deposit insurance; n.a. = not applicable.
Sources: IMF staff reports; Mayer Brown (2009); official websites; and IMF, International Financial Statistics.Note: — = not available; DI = deposit insurance; n.a. = not applicable.
Table 13A.2Preemptive Crisis Responses in Selected G-20 Countries, 2007–09
CountryLiquidity support (percentage point increase in central bank claims on financial institutions as a ratio of deposits and foreign liabilities, relative to precrisis level)Gross restructuring costs (recapitalization and other restructuring costs, excluding liquidity and asset purchases, as a percentage of GDP)Asset purchases and guarantees (funded by treasury and central bank, as a percentage of GDP)Guarantees on liabilities (significant: guarantees of other liabilities in addition to increasing deposit insurance (DI) ceilings)Nationalizations (state takes control of institutions; year of nationalization in parentheses)
Australian.a.n.a.n.a.Unlimited coverage of deposits (if above 1 million Australian dollars, only those with maturity < five years).n.a.
Canada1.8n.a.Purchases: 4.4Temporary insurance on the wholesale term borrowing of deposit-taking institutions. Increased deposit insurance in some provinces.n.a.
Italy2.50.8n.a.n.a.n.a.
Japan1.1< 0.1Purchases: 1.1 Guarantees: 2.6 (for small and medium enterprises)n.a.n.a.
Korea, Republic of2.10.8Purchases: < 0.1 Guarantees: 1.8 (for small and medium enterprises)Payment guarantees to Korean banks’ external debt (US$100 billion cap).n.a.
Sources: IMF staff reports; Mayer Brown (2009); official websites; and IMF, International Financial Statistics.Note: n.a. = not applicable.
Sources: IMF staff reports; Mayer Brown (2009); official websites; and IMF, International Financial Statistics.Note: n.a. = not applicable.
Table 13A.3Direct Fiscal Outlays, Recoveries to Date, and Asset Guarantees, 2007–09(percent of GDP)
Country and actionProgramGrossRecoveriesNet1
Austria
RecapitalizationsCapital injection program2.1
Asset purchasesimpaired assets and liquidity2.0
Total fiscal outlays4.14.1
Asset guaranteesAsset guarantee program0.6
Belgium
RecapitalizationEthias, Fortis, KBC, and Dexia4.7
OtherCapital for Fortis SPV0.2
Total fiscal outlays5.05.0
Asset guaranteesAsset relief facility6.0
Fortis SPV1.3
Fortis portfolio0.4
Total asset guarantees7.77.7
Denmark
RecapitalizationCapital assistance program2.7
Capital injection in Fionia Bank0.1
OtherLoan to Fionia Bank0.3
Total fiscal outlays3.13.1
France
RecapitalizationSPPE acquisition of subordinated bonds0.5
Second-stage recapitalization (BNP, SG, Dexia)0.5
Total fiscal outlays1.01.0
Asset guaranteesFinancial Security Assurance Inc.0.3
Germany
RecapitalizationCapital injection program1.21.2
Asset purchasesAsset purchase program0.2
Total fiscal outlays1.41.4
Asset guaranteesBad Bank Act26.1
Greece
RecapitalizationCapital injection package1.7
OtherLiquidity1.9
Total fiscal outlays3.63.6
Hungary
RecapitalizationCapital injection in FHB (mortgage lender)0.1
OtherForeign exchange loans to large banks2.6
Total fiscal outlays2.71.61.1
Iceland3
RecapitalizationLandsbanki, Kaupthing, and Islandsbanki13.013.0
Ireland
RecapitalizationBank of Ireland, Allied Irish Bank, and Anglo Irish7.67.6
Kazakhstan
RecapitalizationBTA, Halyk, Alliance, and KKB2.4
OtherLiquidity through deposits of the development agency1.3
Total fiscal outlays3.83.8
Latvia
RecapitalizationParex and MLBN2.5
OtherLiquidity2.5
Total fiscal outlays4.94.9
Luxembourg
RecapitalizationFortis and Dexia7.77.7
Netherlands
RecapitalizationFortis, ING, SNS, and AEGON6.5
OtherLoans to Icesave and Icelandic Deposit Insurance0.2
Loan to Fortis5.9
Total fiscal outlays12.75.96.8
Asset guaranteesABN AMRO/Fortis mortgage portfolio6.0
ING Alt-A RMBS portfolio4.8
Total asset guarantees10.8
Mongolia
OtherRestructuring of Avod Bank3.03.0
Portugal
Recapitalization00
Russian Fed.State Mortgage Agency, VTB, Rosselhozbank, Rosagroleasing, VEB1.0
Subordinated loans from VEB0.9
Liquidity through government deposits in commercial banks0.4
Total fiscal outlays2.32.3
Slovenia
LiquidityPublic sector deposits in banks (proceeds from bond issue)2.82.8
Spain
Asset purchasesPurchase of high-quality securities from credit institutions1.81.8
Sweden
RecapitalizationRecapitalization package0.2
OtherInitial contribution to stabilization fund0.5
Total fiscal outlays0.70.7
Switzerland
RecapitalizationMandatory convertible notes UBS1.11.5−0.4
Ukraine
RecapitalizationPublic recapitalization program4.84.8
United Kingdom
RecapitalizationRBS, Lloyds, LBG, and Northern Rock5.0
OtherDunfermline Building Society takeover0.1
Deposit compensation1.8
Loans to Northern Rock and Bradford & Bingley1.9
Total fiscal outlays8.71.07.7
Asset guaranteesPool of RBS assets and contingent convertibles14.5
United States
RecapitalizationCapital purchase program1.4
AIG0.5
Targeted investment program0.3
Support to GMAC0.1
Support to Fannie Mae and Freddie Mac0.8
OtherHome Affordable Modification Program0.2
Credit Union Homeowners Affordability Relief0.1
Program
Asset purchasesMBS purchase1.4
Public-private investment program0.2
Total fiscal outlays4.90.64.3
Asset guaranteesCitigroup asset guarantee
Sources: IMF staff reports; official websites; and Mayer Brown (2009).Note: SPPE = state shareholding company.

Includes repayments up to end-2009 of capital support as well as interest and fees generated from loans and guarantee programs for the cases for which data were available.

Includes total guarantees issued by the Stabilization Fund, which includes items related to the Bad Bank Act as well as debt issued by financial institutions.

The baseline case does not include the increase in debt that would result from the Icesave crisis as part of the fiscal costs. Most disbursements took place at end-2008 and the first half of 2009, so 2009 nominal GDP (from WEO) is used to express the figures as percentage points of GDP.

Sources: IMF staff reports; official websites; and Mayer Brown (2009).Note: SPPE = state shareholding company.

Includes repayments up to end-2009 of capital support as well as interest and fees generated from loans and guarantee programs for the cases for which data were available.

Includes total guarantees issued by the Stabilization Fund, which includes items related to the Bad Bank Act as well as debt issued by financial institutions.

The baseline case does not include the increase in debt that would result from the Icesave crisis as part of the fiscal costs. Most disbursements took place at end-2008 and the first half of 2009, so 2009 nominal GDP (from WEO) is used to express the figures as percentage points of GDP.

Table 13A.4Top 30 Banks in the World by Market Capitalization, 2006 and 2009
Market Capitalization (million US$)Market Capitalization (million US$)
2006 RankBank NameCountry200620092009 RankBank NameCountry2009
1CitigroupUnited States286,33717,0161HSBC HoldingsUnited Kingdom199,785
2Bank of AmericaUnited States251,87268,6602China Construction BankChina193,240
3Mitsubishi UFJ Financial GroupJapan188,03453,0523JP Morgan ChaseUnited States148,484
4HSBC HoldingsUnited Kingdom172,938199,7854Banco SantanderSpain136,918
5JP Morgan ChaseUnited States172,109148,4845Wells Fargo & CoUnited States112,251
6UBSSwitzerland156,45550,2426BNP ParibasFrance95,359
7Banco SantanderSpain127,400136,9187Goldman SachsUnited States69,454
8Wells Fargo & CoUnited States122,056112,2518Ind’l & Commercial Bank of ChinaChina68,968
9Wachovia CorpUnited States114,542Failed9Banco Bilbao Vizcaya ArgentariaSpain68,733
10Mizuho Financial GroupJapan114,24921,42310Bank of AmericaUnited States68,660
11BNP ParibasFrance110,78695,35911Royal Bank of CanadaCanada64,894
12ING GroepNetherlands106,70038,07712National Australia BankAustralia56,732
13Royal Bank of ScotlandUnited Kingdom102,72626,65513UniCreditItaly56,538
14UniCreditItaly99,63956,53814Credit Suisse GroupSwitzerland55,706
15Sumitomo Mitsui FinancialJapan98,38427,42915Intesa SanpaoloItaly53,771
16Credit Suisse GroupSwitzerland96,20355,70616Mitsubishi UFJ Financial GroupJapan53,052
17Banco Bilbao Vizcaya ArgentariaSpain93,33368,73317Société GénéraleFrance52,169
18Goldman SachsUnited States91,45769,45418Standard CharteredUnited Kingdom51,268
19Société GénéraleFrance85,41052,16919Itau Unibanco HoldingsBrazil50,722
20Merrill Lynch & CoUnited States82,235Failed20American ExpressUnited States50,281
21Morgan StanleyUnited States80,55331,30721UBSSwitzerland50,242
22Deutsche BankGermany80,43344,20122BarclaysUnited Kingdom49,295
23BarclaysUnited Kingdom76,73449,29523Commonwealth Bank of AustraliaAustralia48,062
24American Express CompanyUnited States75,28550,28124Deutsche BankGermany44,201
25HBOSUnited Kingdom69,1586,13825Banco do BrasilBrazil43,382
26US BancorpUnited States68,94239,61726Bank of Nova ScotiaCanada43,190
27Crédit AgricoleFrance68,72341,30227Westpac Banking CorpAustralia43,137
28ABN Amro HoldingsNetherlands64,717Failed28Australia and New Zealand BankingAustralia42,473
29FortisBelgium/Netherlands60,6748,88629Crédit AgricoleFrance41,302
30Royal Bank of CanadaCanada59,68664,89430Nordea BankSweden41,284
Total3,377,7671,633,871Total2,153,554
Source: Bankscope.Note: Shaded ranking positions on 2006 list indicate banks no longer among the top 30 in 2009; shaded ranking positions on 2009 list indicate banks that entered the top 30 list in 2009.
Source: Bankscope.Note: Shaded ranking positions on 2006 list indicate banks no longer among the top 30 in 2009; shaded ranking positions on 2009 list indicate banks that entered the top 30 list in 2009.

The lower short-run fiscal costs reflect the relatively swift government announcements of recapitalization measures and other actions to restore the health of the financial system. However, the lower costs were also a consequence of the significant indirect support the financial system received through expansionary monetary and fiscal policy, the widespread use of guarantees on liabilities, and direct purchases of assets that helped sustain asset prices. The significant support deployed through monetary and fiscal policies, including coordinated international efforts to ensure adequate foreign exchange liquidity, and timely implementation of measures to address solvency problems in the financial system, contributed significantly to reducing the real impact of the 2007–09 crises. Moreover, the indirect support from macroeconomic stabilization policies also lifted the burden on traditional crisis management policies, ultimately keeping the direct fiscal costs associated with bank recapitalization and other direct interventions into the financial sector lower than they otherwise would have been.

However, in the medium term, these indirect support measures significantly increased the burden of public debt and the size of government contingent liabilities, raising concerns about fiscal sustainability in a number of countries. Moreover, the crisis is still ongoing (as of late 2013) in several countries and its ultimate impact will have to be reassessed in the future. Therefore, it may be premature to hail recent crisis management efforts as being more successful than those of the past.

References

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The banking crisis data set is available at http://www.imf.org/external/pubs/cat/longres.aspx?sk=23971.0.

When possible, the magnitude of policy interventions and associated fiscal costs are expressed as ratios to GDP rather than banking system size to control for the ability of a country’s economy to support its banking system. This tactic naturally results in higher measured fiscal costs for economies with larger banking systems.

Domestic nondeposit liabilities are excluded from the denominator of this ratio because information on such liabilities is not readily available on a gross basis. For euro area countries, liquidity support is considered to be extensive if in a given half-year the increase in this ratio is at least 5 percentage points. Data on euro area central bank claims are confounded by large volumes of settlements and cross-border claims between banks in the Eurosystem. As a result, the central banks of some euro area countries (notably Germany and Luxembourg) already had large precrisis levels of claims on the financial sector.

Although a quantitative threshold for this criterion is not defined, guarantees in all cases involved significant financial sector commitments relative to the size of the corresponding economies.

Asset purchases also provide liquidity to the system. Therefore, an estimate of total liquidity injected would include schemes such as the Special Liquidity Scheme (185 billion pounds sterling) in the United Kingdom and Norway’s Bond Exchange Scheme (230 billion kroner), as well as liquidity provided directly by the treasury.

One concrete historical example is Latvia’s 1995 crisis; when banks totaling 40 percent of financial system assets were closed, depositors experienced losses, but few of the interventions listed above were implemented.

This new definition of a systemic banking crisis is somewhat more specific than the one used in Chapter 2, which considered systemic crises to include events with “significant policy interventions.” As a consequence, a few cases listed as systemic banking crisis in that previous release would, under this definition, be considered borderline cases: Argentina 1995, Brazil 1990, the Czech Republic 1996, the Philippines 1997, and the United States 1988.

Undoubtedly the most salient events of the U.K. and U.S. financial crises took place in 2008 (such as the bailout of Bear Stearns, the collapse of Lehman Brothers, the takeover of the government-sponsored enterprises, and the Troubled Asset Relief Program in the United States; and the nationalization of the Royal Bank of Scotland in the United Kingdom), but significant signs of financial sector distress and policy actions directed to the financial sector were already observed in 2007 in both cases.

See also Cheasty and Das (2009) for a comparison of announced and used amounts.

In computing end dates, bank credit to the private sector (in national currency) from International Financial Statistics (IFS—line 22d) is used. Bank credit series are deflated using consumer price indices from the IMF’s World Economic Outlook (WEO). GDP in constant prices (in national currency) also comes from the WEO. When credit data are not available, the end date is determined to be the first year before GDP growth is positive for at least two years. In all cases, the duration of a crisis is truncated at five years, including the first crisis year.

For detailed information about the frequency of policy interventions in past crisis episodes, see Chapter 2.

At its peak this variable reached 9.4 and 14.7 percent for Germany and Luxembourg, respectively, but the increments look small because, even before the crisis, banks in these countries maintained high balances because of cross-border settlements. 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 nonresidents. The denominator is then computed as the sum of demand deposits (line 24), other deposits (line 25), and liabilities to nonresidents (line 26).

There are only five crisis episodes among high-income countries in the historical sample.

Latvia satisfies the threshold used in this chapter’s definition of extensive liquidity support once government deposits at Parex are counted.

Because Germany’s Bad Bank Act called for asset transfers, they could also be treated as asset purchases. This analysis treats it as guarantees, so Germany is not listed as having met the significant-asset-purchases threshold.

Data on reserve money come from IFS. For euro area countries, reserve money corresponds to the aggregation of currency issued and liabilities to depository corporations, divided by euro area GDP.

For bank recapitalizations, only “comprehensive” recapitalization packages in which public funds were used are considered, thereby excluding ad hoc interventions and biasing upward the estimate of the response time. In the 2007–09 crises, three recapitalization programs targeted specific banks: Iceland (the three largest banks), Luxembourg (Fortis and Dexia), and Latvia (Parex). The last two are included in the calculation because of the size of the affected institutions. However, the median does not change if they are excluded. Iceland is not included because of limited data for computing the date when liquidity support became extensive.

In many cases, banks were able to raise capital in private markets or from parent banks, which generally took place before public money was used. In addition, many banks were temporarily allowed to avoid the recognition of market losses and thereby overstate regulatory capital.

A comprehensive analysis of guidelines for exit strategies from crises can be found in Blanchard, Cottarelli, and Viñals (2010).

A complete list of global top-30 banks in 2006 and 2009 is reported in Appendix Table 13A.4.

As of 2012, it is still early to provide final numbers about recoveries and losses for recent crises, but wherever funds have been recovered, they have been included in Table 13A.3. Also, potential losses arising from contingent liabilities (such as asset guarantees) and schemes funded by the central bank (such as asset purchases) are not included, although losses from those schemes may ultimately have fiscal consequences.

Output losses are computed as the cumulative sum of the differences between actual and trend real GDP over the period t through t + 3, expressed as a percentage of trend real GDP, with t being the starting year of the crisis. Trend real GDP is computing by applying a Hodrick-Prescott filter (with λ = 100) to the log of real GDP series over t – 20 through t – 1 (or shorter if data are not available, though at least four precrisis observations are required). Real GDP is extrapolated using the trend growth rate during the same period. Real GDP data are from the WEO. For the 2007–09 crisis episodes, GDP projections are based on the April 2010 WEO. The duration of a crisis is truncated at five years, including the first year. Wherever the methodology results in a crisis duration of more than five years, or when data availability impede application of the methodology, the end year is set as the fifth year from the crisis start year.

These costs exclude the obligations (mostly to the United Kingdom and the Netherlands) arising from the Icesave crisis, which in net present value terms, IMF staff estimates to be about 16 percent of GDP.

The increase in debt is computed as a percentage of GDP during t – 1 through t + 3, where t is the starting year of the crisis. The choice of sources is guided by the availability of general government debt. When it is not available, central government debt is reported instead. The primary data source is the WEO. When WEO debt data are not available, the OECD Analytical Database and the IMF’s Government Finance Statistics are used.

Trend GDP is computed applying a Hodrick-Prescott filter to the real GDP series over the 20-year period before the crisis.

The medians reported in Figure 13.9 are based on output losses recomputed for all crisis episodes using the methodology employed in this chapter rather than by relying on estimates of output losses in Laeven and Valencia (2008). They computed the real GDP trend using all available data, using a different horizon for each country. The recomputed 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.

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