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Enquirica Research - IMF Study Shows Supporting Insolvent Banks Hurts the Economy

A study of 124 banking crises by the International Monetary Fund found that supporting insolvent banks hurts the economy.

 
PRLog - Oct. 24, 2011 - A study of 124 banking crises by the International Monetary Fund found that supporting insolvent banks hurts the economy:

“Existing empirical research has shown that providing assistance to banks and their borrowers can be counterproductive, resulting in increased losses to banks, which often abuse forbearance to take unproductive risks at government expense. The typical result of forbearance is a deeper hole in the net worth of banks, crippling tax burdens to finance bank bailouts, and even more severe credit supply contraction and economic decline than would have occurred in the absence of forbearance.

Cross-country analysis to date also shows that accommodative policy measures (such as substantial liquidity support, explicit government guarantee on financial institutions’ liabilities and forbearance from prudential regulations) tend to be fiscally costly and that these particular policies do not necessarily accelerate the speed of economic recovery.

All too often, central banks privilege stability over cost in the heat of the containment phase: if so, they may too liberally extend loans to an illiquid bank which is almost certain to prove insolvent anyway. Also, closure of a nonviable bank is often delayed for too long, even when there are clear signs of insolvency (Lindgren, 2003). Since bank closures face many obstacles, there is a tendency to rely instead on blanket government guarantees which, if the government’s fiscal and political position makes them credible, can work albeit at the cost of placing the burden on the budget, typically squeezing future provision of needed public services.”

Enquirica Research is a Calgary based firm focusing on the analysis of alternative asset classes and investments, primarily in western Canada. For copies of Enquirica research register at www.enquirica.com.
               
DISCLAIMER:  The opinions, estimates, projections and other information which is contained herein and derived from or attributable to persons other than ENQUIRICA is neither endorsed nor adopted by ENQUIRICA – it is presented for informational purposes only.  Further, the opinions, estimates, projections and other information contained herein are not intended and are not to be construed as an offer to sell, or a solicitation to buy any securities, including any exempt market securities, nor shall such opinions, estimates, projections and other information be considered as investment advice or as a recommendation to enter into any transaction or engage an investment advisor or exempt market dealer. Readers must contact their registered investment adviser or exempt market dealer for information that is tailored to their specific needs.

FORWARD-LOOKING INFORMATION: This news release may contain certain information that is forward looking and, by its nature, such forward-looking information is subject to important risks and uncertainties. The words "anticipate", "expect", "may", "should", "estimate", "project", "outlook", "forecast" or other similar words are used to identify such forward looking information. Those forward-looking statements herein made by ENQUIRICA, if any, reflect ENQUIRICA’s beliefs and assumptions based on information available at the time the statements were made.  Actual results or events may differ from those anticipated or predicted in these forward-looking statements, and the differences may be material.   Readers are cautioned not to place undue reliance on any forward-looking information contained in this news release (if any), which is given as of the date it is expressed herein. ENQUIRICA undertakes no obligation to update publicly or revise any forward-looking information, whether as a result of new information, future events or otherwise.

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Enquirica Research is a Calgary based firm focussing on the analysis of alternative asset classes and investments, primarily in western Canada. For copies of Enquirica research register at www.enquirica.com. Enquirica also operates Enquirica TV.

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Source:Enquirica
City/Town:Calgary - Alberta - Canada
Industry:Finance
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