Bank Bailouts and Fiscal Contingent Liabilities

Davide Salvatore Mare, Martin Melecký and Hanna Murina

No 10273, Policy Research Working Paper Series from The World Bank

Abstract: Government intervention to bail out troubled banks can produce a sizable fiscal contingent liability. Drawing on a rich history of various forms of staggered bailouts, this paper studies the link between bank bailouts and fiscal contingent liabilities using bank-level data for Kazakhstan—an upper-middle-income country in Central Asia. The paper first estimates the probability that a bank in distress is bailed out, conditioning on bank characteristics and financial soundness. Second, it estimates the magnitude of bailout costs depending on the size of banks, their ownership type, financial soundness, and the type of bailout instrument used by the government. The latter aims to contrast the fiscal costs when the government uses bailout instruments without recourse on bank future profits—such as government purchases of bad loans above market value—versus instruments that require repayment of the public support with adequate compensation for the government’s alternative costs—such as properly governed equity injections. Third, the paper illustrates how the estimations could be used for projecting the expected contingent liabilities from bank bailouts.

Date: 2023-01-09
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