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 fail 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 interventions in critical states which may require interest rate controls and restructuring of the banking industry. These policies can be reinforced by random bail-outs and temporary financial relief, with a large percentage of the costs being covered by current and future owners of banks.banking crises, deposit insurance, banking regulation