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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.
“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’
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.
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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.