Banking crises and government intervention

García-Palacios, Jaime H. and Hasman, Augusto and Samartín, Margarita (2014). Banking crises and government intervention. "Journal of Financial Stability", v. 15 ; pp. 32-42. ISSN 1572-3089.


Title: Banking crises and government intervention
  • García-Palacios, Jaime H.
  • Hasman, Augusto
  • Samartín, Margarita
Item Type: Article
Título de Revista/Publicación: Journal of Financial Stability
Date: December 2014
Volume: 15
Freetext Keywords: Banking crises; Capital requirements; Government intervention; Moral hazard
Faculty: E.T.S.I. Caminos, Canales y Puertos (UPM)
Department: Ingeniería Civil: Hidráulica, Energía y Medio Ambiente
Creative Commons Licenses: Recognition - No derivative works - Non commercial

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Intervention has taken different forms in different countries and periods of time. Moreover, recent episodes showed that in front of an imminent crisis, the promise of no interventions made by governments is barely credible. In this paper we address the problem of resolving banking crises from the government perspective, taking into account the fact that preventing banking crises is crucial for the government. In addition, we introduce the moral hazard problem, inherent in the banking system, and consider the interaction between regulation, policy measures and banks’ behavior. To the best of our knowledge, this is the first paper that compares different policy plans to resolve banking crises in an environment where insufficiently capitalized banks have incentives to take risk, and the government has to decide whether to provide public services or impede crises. We show that when individuals highly value public services then the best policy in terms of welfare is to apply the tax on early withdrawals, as the government can transfer those taxes to the whole population by investing in public services (although at some cost). Conversely, when individuals assign a low value to consuming public services, recapitalization is the dominant policy. Finally, when the probability of a crisis is sufficiently high, capital requirements should be used

Funding Projects

Government of SpainECO2013-42849-PUnspecifiedUnspecifiedUnspecified

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Item ID: 40230
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Deposited by: Memoria Investigacion
Deposited on: 19 May 2016 12:47
Last Modified: 19 May 2016 12:47
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