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Luc Laeven is Deputy Division Chief in the Research Department of the International Monetary Fund and Research Fellow at CEPR, and Fabian Valencia is Economist in the Research Department of the International Monetary Fund. 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 and/or discussions, and Jeanne Verrier for outstanding research assistance.
We express, when possible, the magnitude of policy interventions and associated fiscal costs in terms of GDP rather than banking system size to control for the ability of a country’s economy to support its banking system. This naturally results in higher measured fiscal costs for economies with larger banking systems.
We exclude domestic non-deposit liabilities from the denominator of this ratio because information on such liabilities is not readily available on a gross basis. For Euro-area countries, we also consider liquidity support to be extensive if in a given semester the increase in this ratio is at least 5 percentage points. The reason is that 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) had already large pre-crisis levels of claims on the financial sector.
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 bn pounds sterling) in the United Kingdom and Norway’s Bond Exchange Scheme (230 bn kronas), as well as liquidity provided directly by the Treasury.
Although we do not consider a quantitative threshold for this criteria, in all cases guarantees involved significant financial sector commitments relative to the size of the corresponding economies.
One concrete historical example is Latvia’s 1995 crisis, when banks totaling 40 percent of financial system’s assets were closed, depositors experienced losses, but few of the interventions listed above were implemented.
Our new definition of a systemic banking crisis is somewhat more specific than the one used in Laeven and Valencia (2008), where systemic crises were considered to include events with “significant policy interventions”. As a consequence, a few cases listed as systemic banking crisis in our previous release, would under this definition be considered borderline cases: Brazil 1990, Argentina 1995, Czech Republic 1996, Philippines 1997, and United States 1988.
While undoubtedly the most salient events of the UK and US financial crises took place in 2008 (such as the bailout of Bear Stearns, the collapse of Lehman Brothers, the takeover of the GSEs, and the TARP programs in the US; and the nationalization of the Royal Bank of Scotland in the UK), significant signs of financial sector distress and policy actions directed to the financial sector were in both cases already observed in 2007.
In computing end dates, we use bank credit to the private sector (in national currency) from IFS (line 22d). Bank credit series are deflated using CPI from WEO. GDP in constant prices (in national currency) also comes from the WEO. When credit data is not available, the end date is determined as the first year before GDP growth is positive for at least two years. In all cases, we truncate the duration of a crisis at 5 years, including the first crisis year.
For Germany and Luxembourg, while at the peak this variable reached 9.4 and 14.7 percent respectively, the increments look small because banks in these countries already maintained high balances prior to the crisis due to 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 non-residents. Total deposits are computed as the sum of demand deposits (line 24), other deposits (line 25), and liabilities to non-residents (line 26).
It is worth clarifying that there are only 5 historical (pre-2007) crisis episodes among high-income countries in our historical sample.
In the case of Latvia, the threshold used in our definition of extensive liquidity support is satisfied once government deposits at Parex are counted as liquidity support.
Because Germany’s Bad Bank implies asset transfers, it could also be treated as asset purchases. Yet, we treat it as guarantees, and therefore do not list Germany as also having met the significant asset purchases threshold.
Data on reserve money comes 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, we only consider “comprehensive” recapitalization packages in which public funds were used, thereby excluding ad hoc interventions and biasing upwards our estimate of the response time. In the new crises, three recapitalization programs targeted specific banks: Iceland (the three largest banks), Luxembourg (Fortis and Dexia), and Latvia (Parex). We include the last two in our calculation because of the size of the affected institutions. However, the median does not change if we exclude them. We do not include Iceland because of limited data on liquidity support as to compute the date when it became extensive.
In many cases, banks were able to raise capital in private markets or from parent banks, and generally this took place before public money was used. In addition, many banks have temporarily been 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 et al. (2010).
It is too early to provide reliable estimates about future recoveries and losses for recent crises, but wherever funds have been recovered, they have been included in Table A.3. Also, we do not include potential losses arising from contingent liabilities (such as asset guarantees) and schemes funded by the central bank (such as asset purchases), although we recognize that losses in 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, T+3], expressed as a percentage of trend real GDP, with T the starting year of the crisis. Trend real GDP is computing by applying an HP filter (with λ=100) to the log of real GDP series over [T-20, T-1] (or shorter if data is not available, though we require at least 4 pre-crisis observations). Real GDP is extrapolated using the trend growth rate over the same period. Real GDP data are from WEO. For recent crisis episodes, GDP projections are based on April 2010 WEO. We truncate the duration of a crisis at 5 years, including the first year. Wherever our methodology results in a crisis duration over 5 years, or when data availability impede us from applying our methodology, we set the end year as the fifth year from the crisis start year.
These higher fiscal costs in part reflect an increase in average banking system size.
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 around 16 percent of GDP.
We compute the increase in debt measured in percent of GDP over [T-1, T+3], where T is the starting year of the crisis. Our choice of sources is guided by the availability of general government debt. When it is not available, central government debt is reported instead. Our primary data source is WEO. When WEO debt data are not available, we resort to the OECD Analytical Database and the IMF’s Government Finance Statistics.
The medians reported in the graph are based on output losses that have been recomputed for all crisis episodes using the methodology employed in this paper rather than by relying on estimates of output losses in Laeven and Valencia (2008). They computed the real GDP trend using all available data, implying a different horizon for each country. The new 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.