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Managing Systemic Banking Crises
David S. Hoelscher
Systemic Banking Issues Division
MFD/IMF
Introduction
1. Recent systemic banking crises have emerged in Argentina,
Ecuador, Mexico, Turkey, and Uruguay.
2. These recent crises introduce new challenges not seen in the
Asian banking crises of the late 1990s.
1. What identifies systemic banking crises?
 A banking crisis is systemic when a loss of confidence the
financial system is sufficiently large to have an impact on the
real economy.
 The real effects arise from disruptions to the payments
system, reduction in credit, and loss of asset value.
 A key feature is the impossibility of distinguishing viable from
nonviable banks.
Fiscal Costs of Systemic Crises
(In percentage of GDP)
Indonesia 1997-present
Chile 1981-1983
Thailand 1997-present
Turkey 2000-present
Korea 1997-present
Ecuador 1998-2001
Mexico 1994-1995
Venezuela 1994-1995
Finland 1991-1993
Malaysia 1997-2001
Sweden 1991-1993
Gross Cost
United States 1984-1991
Net Cost
Norway 1987-1989
0
Sources: IFS, WEO and national authorities.
10
20
30
40
50
60
2. Triggers of crisis
 Banking distress can persist for considerable time.
 A crisis can be triggers by any number of events
– economic developments
– political factors
– just bad luck
 Irrespective of origin, a crisis first emerges as a liquidity
problem in one, or some, or all banks
3. Stylized Phases of Crisis Management
 Phase 1 – Crisis Containment
 Phase 2 – Bank Restructuring and Resolution
 Phase 3 – Management of Impaired Assets
3. Phase 1 - Containing the Crisis
 Objective: Stabilize bank liabilities and protect the payment
system
 Measures:
• Provide liquidity support to illiquid institutions
• Sterilize support with appropriate monetary policy
• Protect depositors (establishing a blanket guarantee has proven
successful in some circumstances)
• Once depositors protected, remove nonviable banks
• Announce a medium-term restructuring program
• If all this fails: resort to administrative measures as a very last resort
4. Phase 2 - Bank Restructuring
 Objective: Restore viability and efficiency of the
sector
 Measures:
– Diagnosis
– Legal and institutional reform
– Resolution of weak banks
Phase 2 - Bank Restructuring (2)
 Diagnosis
- A medium term perspective needed
- Need to evaluate banks based on uniform criteria
- Special audits have been tried with mixed results
- Classify banks into viable and nonviable banks.
Phase 2 - Bank Restructuring (3)
 Institutional and legal arrangements
– A single, high level authority is needed to provide political
support and coordinate efforts
– Where possible, existing institutions should be charged with
implementation
– Where institutional or legal reforms are needed, quick
progress is needed.
4. Bank Restructuring (4)
 Bank Resolution
Viable, undercapitalized banks:
 Shareholder responsible for recapitalization
 Present time-bound restructuring plans
 Be subject to intensive reporting and monitoring
Insolvent, unviable banks:
 Should be intervened and resolved quickly.
 The bank may be resolved, but the banking business preserved.
 Deposits should be transferred to sound banks.
 Should be passed to agency responsible for resolution.
 Resolution options guided by “least cost” criteria.
4. Bank Restructuring (5)
 Use of public funds for recapitalization:
• May be justified under special circumstances
• Should be last resort
• Could be designed to encourage private sector contributions
5. Phase 3 – Management of Impaired Assets
Objective: Ensure orderly management of weak bank assets
Dealing with impaired assets
- centralized versus decentralized
- speed versus value
6. Recent Challenges
 Dollarization
 Sovereign Debt Restructuring
Dollarization
 Issues
– Complicates management of deposit runs
– Increases credit risk
– Reduces effectiveness of policy tools (LOLR, blanket
guarantees)
 Measures
– Increase liquidity coverage for dollar deposits
– Obtain foreign credit lines to support international reserves
– As a last resort, administrative measures may be only
option
Sovereign Debt Restructuring
Few cases to analyze
 Impact depends on unknowables
– Bank exposure to the sovereign
– Currency denomination of debt
– Terms and modalities of restructuring
 Any strategy for sovereign restructuring must include explicit
consideration of the impact on the financial system.
7. Conclusions and Lessons
1.
Supportive legal and institutional framework should be in
place before crisis hits
2.
Make sure official safety nets are designed correctly (LOLR,
blanket guarantee)
3.
Aim for quick resolution, when momentum is there
4.
Transparency in government actions is essential
5.
Last but not least: Need for political leadership and
coordination