By: Larry MacDonald
An IMF Working Paper released in September sheds some light on banking crises. In Systemic Banking Crises: A New Database, authors Luc Laeven and Fabien Valencia present a comprehensive data base on the banking crises that have occurred around the world in recent decades.
What’s a bit surprising is the number. There were 124 “systemic banking crises” spread across dozens of countries between 1970 and 2007 (see appendix).
A downer is the average fiscal cost (cost of government bailouts) of the crises. “Fiscal costs, net of recoveries, associated with crisis management can be substantial, averaging about 13.3 percent of GDP, and can be as high as 55.1 percent of GDP,” note the authors. The $1 trillion (U.S.) estimate bandied about for the U.S. financial crisis seems gargantuan but is still far below 13.3 per cent of U.S. GDP. Could the final cost end up being even more monumental?
Also on the depressing side are the output losses due to systemic banking crises. The IMF document says they have “averaged about 20 per cent of GDP during the first four years of the crisis, and range from zero per cent to a high of 98 per cent of GDP.”
Interestingly, “there appears to be a negative correlation between output losses and fiscal costs, suggesting that the cost of a crisis is paid either through fiscal costs or larger output losses. Furthermore … even in the absence of significant government intervention, fiscal losses may be large due to tax revenues forgone because of higher output losses.”
Appendix: Canada was one of the few countries not to appear on the IMF list. An oligopolistic industry does have its advantages, it seems. Could lower levels of competition mean less pressure to lower credit standards?
4 Responses to “ IMF study of banking crises ”
Few people have a 20,000-foot view , and most commentators speak from a ‘vested interest position’. Witness ABC News tonight. Who spoke negatively about the failure of Congress to pass the Bill – money managers who saw their client accounts erode today, and with that erosion, erosion of their fees.
By OilyGasMiner on Sep 30, 2008
It is certainly surprising that there were a large number of banking crises. Does the absence of Canada in the list mean that we are due for one in the future?
By Canadian Capitalist on Oct 1, 2008
CC
Canadian banks may have been more conservative in their lending but if the commodity boom continues to recede, one wonders if there will at least be some loan loss provisions to be declared in quarters ahead.
By Larry MacDonald on Oct 1, 2008
It was not competition that drove disregard for prudent lending standards, but the human frailty of unbridled greed by lenders and anyone else in the food chain that stood to gain in the short term. Again, to expect anything different than what happened is folly. Seems logical to the casual observer that to prevent known weaknesses in any system, you must design in safety measures even if they are called regulations.
Just look at the results of WS after their push to gain entry into the mortgage markets to ostensibly “remain competitive in a changing world economy”. We now see what their motivation was to avoid any and all oversight and regulations, it was so they could wring every cent out of the segment before it exploded and then to foist the losses on someone else. You don’t need multiple PhD’s to see this.
Each day more and more Americans will grow to see what has happened and demand that the 3 branches of our government all get together behind closed doors and take a hard look and the definition of “treason”, and make the perpetrators and all those who profited from this financial mess pay the bailout costs, any other solution will result in total anarchy as the masses are taxed to death and stripped of their savings and assets.
Who said “greed is good”?
KO
By Kasual Observer on Oct 15, 2008