The Use of Blanket Guarantees in Banking Crises

By Luc Laeven, Fabián Valencia. Social Science Research Network, 2008

147 citations recorded by the source corpus.

In episodes of significant banking distress or perceived systemic risk to the financial system, policymakers have often opted for issuing blanket guarantees on bank liabilities to stop or avoid widespread bank runs. In theory, blanket guarantees can prevent bank runs if they are credible. However, guarantee could add substantial fiscal costs to bank restructuring programs and may increase moral hazard going forward. Using a sample of 42 episodes of banking crises, this paper finds that blanket guarantees are successful in reducing liquidity pressures on banks arising from deposit withdrawals. However, banks' foreign liabilities appear virtually irresponsive to blanket guarantees. Furthermore, guarantees tend to be fiscally costly, though this positive association arises in large part because guarantees tend to be employed in conjunction with extensive liquidity support and when crises are severe.

View Paper: https://www.semanticscholar.org/paper/42355cd5493e168136db38960ce47d60433c7940

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Citations in the corpus

Systemic Banking Crises Database II (2013, unknown): “Laeven and Valencia (2012) examine the experience of 42 crisis episodes, of which 14 made use of explicit guarantees on bank liabilities and find that these guarantees do help to reduce liquidity pressures on banks.”
Simulation methods to assess the danger of contagion in interbank markets (2011, background): “20 See Reinhart and Rogoff (2009) and Laeven and Valencia (2008) for recent studies of the origins of banking crises.”