Fiscal contingency planning for banking crises

Patrick Honohan

No 2228, Policy Research Working Paper Series from The World Bank

Abstract: There is constant demand for an estimate of the likely fiscal costs of future banking crises, but little precision can be expected in such an estimate. The author shows how information that is typically available to authorities could be used to get a general sense of the order of magnitude of the direct fiscal liability. What is required for such an estimate? 1) Information about the size and composition of the bank's balance sheets. 2) Expert assessments of the accuracy of the accounting data and of specific short-term risks to which the components are known to be subject. The author's method distinguishes between losses that have already crystallized and the changing risks for the immediate future. By including contingency planning for banking collapse in their fiscal calculations, authorities may risk destabilizing expectations or worsening the moral hazard in the system. But the risks of contingency planning generally outweigh the risks of sending confused signals. Insisting on ignorance is a poor way to protect against announcement errors that trigger panic.

Keywords: Insurance&Risk Mitigation; Banks&Banking Reform; Financial Intermediation; Payment Systems&Infrastructure; Financial Crisis Management&Restructuring; Banks&Banking Reform; Financial Intermediation; Financial Crisis Management&Restructuring; Insurance&Risk Mitigation; National Governance (search for similar items in EconPapers)
Date: 1999-11-30
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Citations: View citations in EconPapers (2)

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