The Benefits and Costs of Intervening in Banking Crises

Edward Frydl and Marc Quintyn

No 2000/147, IMF Working Papers from International Monetary Fund

Abstract: This paper provides a framework to assess the benefits and costs of intervening in a banking crisis. Intervention involves liquidity support and resolution actions. Principal benefits of intervention include avoiding panic and eliminating the economic costs of distorted incentives. Principal costs include fiscal costs and the economic costs of delay. The government’s main decision concerns the length of the resolution horizon—whether to adopt a deliberate or an aggressive resolution strategy. Dominant factors affecting net benefits are the relative size of the banking system and the loss liquidation rate on assets financed by bank loans.

Keywords: WP; banking system; risk premium; central bank; medium of exchange; banking crises; resolution costs; fiscal cost; bank assets; credit crunch; net benefit; book value; asset loss; expected return; deposit guarantee; economic cost; banking system assets; capital gain; Commercial banks; Moral hazard; Asset valuation; Asia and Pacific (search for similar items in EconPapers)
Pages: 78
Date: 2000-08-01
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Citations: View citations in EconPapers (10)

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