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The Use of Blanket Guarantees in Banking Crises
Author:
Mr. Luc Laeven
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Mr. Fabian Valencia
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Series:
IMF Working Papers
Volume/Issue:
Volume 2008: Issue 250
Language:
English
Publication Date:
01 Oct 2008
DOI:
https://doi.org/10.5089/9781451871081.001
ISBN:
9781451871081
ISSN:
1018-5941
Pages:
43
Keywords:
WP; liquidity support; bank; guarantee
Legal-disclaimer:
IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.
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In episodes of significant banking distress or perceived systemic risk to the financial system, policymakers have often opted for issuing blanket guarantees on bank liabilities to stop or avoid widespread bank runs. In theory, blanket guarantees can prevent bank runs if they are credible. However, guarantee could add substantial fiscal costs to bank restructuring programs and may increase moral hazard going forward. Using a sample of 42 episodes of banking crises, this paper finds that blanket guarantees are successful in reducing liquidity pressures on banks arising from deposit withdrawals. However, banks' foreign liabilities appear virtually irresponsive to blanket guarantees. Furthermore, guarantees tend to be fiscally costly, though this positive association arises in large part because guarantees tend to be employed in conjunction with extensive liquidity support and when crises are severe.
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Cover IMF Working Papers
IMF Working Papers
ISSN:
1018-5941
Publisher:
International Monetary Fund