The use of blanket guarantees in banking crises

L. Laeven, F. Valencia

Research output: Contribution to journalArticleScientificpeer-review

Abstract

Policymakers often use guarantees on bank liabilities to prevent or contain bank runs during systemic banking crises, but their success has been debated. Using a sample of 42 episodes of banking crises, this paper finds that blanket guarantees do help to reduce liquidity pressures on banks, but only partially since they do not stem withdrawals from non-residents. Withdrawals following the announcement of guarantees are much more pronounced for non-resident liabilities than for foreign-currency denominated deposits—which may also be held by residents—suggesting that the results on non-residents are not driven by foreign-currency risk but by concerns about the government’s ability and commitment to honor the guarantee to non-resident liability holders.
Original languageEnglish
Pages (from-to)1220-1248
JournalJournal of International Money and Finance
Volume31
Issue number5
DOIs
Publication statusPublished - 2012

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Banking crisis
Guarantee
Liability
Foreign currency
Announcement
Politicians
Bank runs
Currency risk
Liquidity
Government

Cite this

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The use of blanket guarantees in banking crises. / Laeven, L.; Valencia, F.

In: Journal of International Money and Finance, Vol. 31, No. 5, 2012, p. 1220-1248.

Research output: Contribution to journalArticleScientificpeer-review

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AU - Valencia, F.

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AB - Policymakers often use guarantees on bank liabilities to prevent or contain bank runs during systemic banking crises, but their success has been debated. Using a sample of 42 episodes of banking crises, this paper finds that blanket guarantees do help to reduce liquidity pressures on banks, but only partially since they do not stem withdrawals from non-residents. Withdrawals following the announcement of guarantees are much more pronounced for non-resident liabilities than for foreign-currency denominated deposits—which may also be held by residents—suggesting that the results on non-residents are not driven by foreign-currency risk but by concerns about the government’s ability and commitment to honor the guarantee to non-resident liability holders.

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