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The fiscal costs of systemic banking crises

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International Finance

Published online on


This paper examines fiscal costs of systemic banking crises. It uses a dataset of 65 crisis episodes since 1980 and considers both the direct budgetary cost of government intervention and the overall fiscal impact as proxied by changes in the public debt‐to‐GDP ratio. We find that both direct and overall fiscal impacts of banking crises are high when countries enter the crisis with large banking sectors, rely on excessive external funding, have highly leveraged non‐financial private sectors, and resort to using government guarantees on bank liabilities during the crisis. Better quality of banking supervision and higher coverage of deposit insurance help, however, alleviate the direct fiscal costs. We also identify a policy trade‐off: costly short‐term interventions are not necessarily associated with larger increases in public debt, supporting the thesis that immediate intervention may actually be a more cost‐effective solution over the long term.