Picked this up off Constantin Gurdgiev's twitter (a man worth following, believe me), thought ye might like a laugh. From a paper produced by our main man at the Central Bank, the patriot Paddy Honohan, in September 2000. Look particularly to the final two paragraphs.
WP'S ZLf I
POLICY RESEARCH WORKING PAPER 2441
Controlling Fiscal Costs of Banking Crises
Patrick Honohan and Daniela Klingebiel
The World Bank*
I. Introduction
In recent decades, a majority of countries - rich and poor alike – have experienced a systemic banking crisis, requiring a major - and expensive - overhaul of their banking system. Not only do banking crises hit the budget with outlays that have to be absorbed by higher taxation (or spending cuts), but they are also costly in terms of foregone economic output.
Many different policy recommendations have been made for limiting the cost of crises; but there has been little systematic effort to see whether these recommendations work in practice. This paper attempts to bridge that gap. Specifically, we seek to quantify
the extent to which fiscal outlays incurred in resolving banking system distress can be attributed to crisis management measures of a particular kind adopted by the government during the early years of the crisis. We do this by analyzing forty crises around the world for which we have data. This data includes information on costs and on the nature of the resolution and intervention policy.
We find that fiscal costs are systematically associated with a set of crisis management strategies. Our empirical findings reveal that unlimited deposit guarantees, open-ended liquidity support, repeated recapitalizations, debtor bail-outs and regulatory forbearance add significantly and sizably to costs (isn't this exactly what the ECB - Honohan its Irish Central Bank rep - forced our government to do? - DO'F).
Using the regression results to simulate the effects of these policies, we find that if countries had not extended unlimited deposit guarantees, open-ended liquidity support, repeated recapitalizations, debtor bailouts and regulatory forbearance, average fiscal costs in our sample could have been limited to about 1 per cent of GDI' - little more than a tenth of what was actually experienced. On the other hand, policy could have been worse: had countries engaged in all of the above policies the regression results imply that fiscal costs in excess of 60 per cent of GDP would have been the result (my italics, but again, isn't this exactly what was mandated here by the ECB, and isn't this what's happening, our debt/GDP ratio rising out of sight??? - DO'F).
