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2012 | OriginalPaper | Chapter

4. Systemic Crises

Authors : Matej Marinč, Razvan Vlahu

Published in: The Economics of Bank Bankruptcy Law

Publisher: Springer Berlin Heidelberg

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Abstract

In order to design the optimal bank restructuring policies, it is important to distinguish between the failure of an individual bank and a bank panic. Theoretical and empirical literature reveals that restructuring policies in a systemic crisis need to be much broader than in the case of an individual bank failure. We first review the theoretical literature on optimal restructuring of banks in a systemic crisis. Second, we survey the empirical literature on systemic crisis. Finally, we evaluate various containment and restructuring methods.

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Footnotes
1
Puri et al. (2009) find that in the 2007–2009 financial crisis German Landesbanken with substantial subprime exposure reduced lending more than their less-exposed peers.
 
2
In the 2007–2009 financial crisis, banks in the U.S. reduced new lending by 68% in the 3 months after the Lehman Brothers collapse (Bolton et al. 2009; Ivashina and Scharfstein 2008). Ivashina and Scharfstein (2010) show that the decline was due to smaller credit supply by banks and occurred despite a large infusion of liquidity by the Federal Reserve.
 
3
In the ex-ante sense, asset bubbles cannot be left alone waiting for them to pop up on their own. The regulator needs to confront them through tight monetary policy, for example.
 
4
The European Commission allowed for state aid to support companies and banks hit by the 2007–2009 financial crisis (see European Commission 2009a, 2010c).
 
5
A liquidity shock to the bank is transmitted to small and medium-sized enterprises in particular (see Khwaja and Mian 2008).
 
6
The values of firms (especially of small and bank-dependent firms) depend on the strength of their banks. A systemic shock to the banking system therefore hampers the value of firms, which leads to another shock to the value of banks.
 
7
Ingves and Lind (1996) present a Swedish experience in the treatment of systemic bank crisis. They argue that, after public confidence is established, organization and labor to deal with the systemic risk has to be put in place as independently as possible from political pressures. Banks have to be treated differently depending on how undercapitalized they are. Realistic goals for bank managers and restructuring agents need to be set.
 
8
Alternatively, higher blanket guarantees may be responsible for higher fiscal costs. Our simplistic method of comparison does not allow us to analyze the direction of causality.
 
9
It is beyond the scope of this book to carefully study the impact of various fiscal and monetary measures on crisis prevention or crisis recovery. See, for example, Reinhart and Reinhart (2010).
 
10
Reinhart and Rogoff (2009) argue that the increasing public debt is mainly a consequence of fading tax income due to economic recession and to a lower extent due to government support for the banking system. However, they do not account for government guarantees, which rise quickly during financial crises.
 
11
Note that government assistance is defined only as public capital assistance in which the government acquires a minority stake in the failing bank. This explains the relatively low figure of government assistance for Ireland compared to the one in Figure 4.5.
 
12
All 13 assistance transactions occurred in a period of less than 2 months from 23 November 2008 to 16 January 2009. Bank of America ($1.5 trillion of assets) and Citibank ($1.2 trillion of assets) were by far the largest of the assisted banks (FDIC 2010).
 
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Metadata
Title
Systemic Crises
Authors
Matej Marinč
Razvan Vlahu
Copyright Year
2012
Publisher
Springer Berlin Heidelberg
Book
The Economics of Bank Bankruptcy Law

Print ISBN: 978-3-642-21806-4

Electronic ISBN: 978-3-642-21807-1

Copyright Year: 2012

DOI
https://doi.org/10.1007/978-3-642-21807-1_4