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5 - Policies for Banking Crises: A Theoretical Framework
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- By Rafael Repullo, CEMFI and CEPR
- Edited by Patrick Honohan, The World Bank, Luc Laeven, The World Bank
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- Book:
- Systemic Financial Crises
- Published online:
- 24 August 2009
- Print publication:
- 26 September 2005, pp 137-168
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Summary
INTRODUCTION
Recent cross-country studies by Honohan and Klingebiel (2003) and Claessens, Klingebiel, and Laeven (Chapter 6) examine to what extent the fiscal costs incurred in a banking crisis can be attributed to specific measures adopted by the governments during the early stages of the crisis, and conclude that “blanket deposit guarantees, open-ended liquidity support, repeated recapitalizations, debtor bailouts and regulatory forbearance all tend to add significantly and sizably to (fiscal) costs.”
The purpose of this chapter is to provide a theoretical framework that can help to understand the different effects of these policies on ex ante risk-shifting incentives and ex post fiscal costs. Specifically, we set up a model of information-based bank runs in which there is a profit-maximizing bank that is funded with insured and uninsured deposits that require an expected return that is normalized to zero. There is a moral hazard problem in that after raising these funds, the bank privately chooses the risk of its loan portfolio. Subsequently, the uninsured depositors observe a signal that contains information on the future return of this portfolio, and withdraw their funds if the signal is bad. In such case, the bank is liquidated unless the government provides the required emergency liquidity or extends the insurance to all depositors. Assuming that the adoption of any of these measures is correctly anticipated by the depositors and the bank, we characterize the equilibrium interest rate of the uninsured deposits and the equilibrium choice of risk by the bank.
Discussion
- Edited by Colin Mayer, University of Warwick, Xavier Vives, Universitat Autònoma de Barcelona
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- Book:
- Capital Markets and Financial Intermediation
- Published online:
- 04 August 2010
- Print publication:
- 20 May 1993, pp 255-261
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Summary
The purpose of the paper by Begg and Portes is to discuss the problem of enterprise debt in the context of the transformation of the economies of Central and Eastern Europe, and to propose a sequencing of reforms designed to tackle it.
In these comments I will first consider the stylized facts documented in the paper, then I will propose a simple model of banking that captures some of the costs of increased bank lending to state-owned enterprises, to conclude with some comments on the policy proposals set out in the paper.
The facts
The paper starts with a section in which the problem is identified. I have two comments on this section. First, I do not find the evidence on the magnitude of the problem entirely convincing. In particular, Tables 8.1 and 8.3 do not show a very significant pattern of increased bank credit to state-owned enterprises in Central and Eastern Europe. Second, I think that the discussion of the causes and consequences of the explosion of inter-enterprise credit is much weaker than what would be required to support the line of argument in the paper. In this respect, I would have liked to see a serious effort to model the relationship between bank and interfirm credit. At any rate, I basically agree with the conclusion that ‘policy should address the financial health of banks and enterprises [and that] with that restored, inter-enterprise credit will take care of itself’.
3 - A theory of financial development
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- By Oren Sussman, Hebrew University of Jerusalem, David Begg, Birkbeck College, London, and CEPR, Rafael Repullo, Banco de España and CEPR
- Edited by Alberto Giovannini, Columbia University, New York
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- Book:
- Finance and Development
- Published online:
- 05 November 2011
- Print publication:
- 25 March 1993, pp 29-64
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Summary
Introduction
That financial structure and economic development are interrelated is a well known hypothesis (see Goldsmith, 1969, McKinnon, 1973, Shaw, 1973, Kuznets, 1971, Cameron, 1967 and Townsend, 1983; see also Gertler, 1988, for an excellent survey of the background and Greenwood and Jovanovic, 1989, for a recent contribution). In the present paper, we utilize some recent developments in the theory of contracts and the organization of financial markets (most notably Diamond, 1984, and Gale and Hellwig, 1985), in order to reformulate the financial development hypothesis in a way which is both theoretically comprehensible, and empirically testable. We focus on the ‘gross markup’ of the banking system, roughly the gap between the (real) rate at which banks borrow and lend money. This gap reflects (in addition to the more conventional default-premium component), the cost of financial intermediation. In the theoretical part we construct a spatial model of a monopolistically competitive banking system. When the capital stock increases, the market for financial intermediation grows, and the number of banks increases (due to entry). Each bank becomes more specialized, and thus efficient, over a smaller market share. Also, the industry becomes more competitive. As a result the cost of intermediation falls and the markup decreases. In the empirical part we present some evidence showing that the markup is lower in high-income countries relative to low-income countries.