The workout of banking crises. A macroeconomic perspective

This paper provides a macroeconomic perspective for government interventions in banking crises. We illustrate how vulnerabilities of the banking sector may build up over time and thus destabilize a banking system. A crisis occurs when a large number of banks fail to meet capital requirements or are insolvent. Based on a macroeconomic model with financial intermediation, our reasoning suggests that in good and moderate times strict enforcement of capital adequate rules suffices. Interest rate intervention or cartelization and restructuring of the banking industry becomes necessary in critical times. These policies should be reenforced by random bail-outs and subsidies in bad times.