The workout of banking crises : a macroeconomic perspective

This paper provides a macroeconomic perspective for government interventions in banking crises. Such crises occur when a large number of banks fall to meet capital requirements or are insolvent. Using a macroeconomic model with financial intermediation, our analysis suggests that strict enforcement of capital-adequate rules suffices in prosperous periods. Capital requirements serve as an indicator for crises inverventions in critical states which may require interest rate intervention and restructuring of the banking industry. These policies can be reinforced by random bailouts and temporary financial relief, with a large percentage of the costs being covered by current and future owners of banks.