Lessons for rescuing a SIFI: The Banque de France’s 1889 ‘lifeboat’
Pierre-Cyrille Hautcoeur, Angelo Riva, Eugene N. White 02 July 2014
The key challenge for lenders of last resort is to ameliorate financial crises without encouraging excessive risk-taking. This column discusses the lessons from the Banque de France’s successful handling of the crisis of 1889. Recognising its systemic importance, the Banque provided an emergency loan to the insolvent Comptoir d’Escompte. Banks that shared responsibility for the crisis were forced to guarantee the losses, which were ultimately recouped by large fines – notably on the Comptoir’s board of directors. This appears to have reduced moral hazard – there were no financial crises in France for 25 years.
In the aftermath of the 2008 financial crisis, the Dodd-Frank Act of 2010 set out to limit the authority of the Federal Reserve to rescue insolvent financial institutions. Since 1932, Section 13(3) of the Federal Reserve Act had given the agency the power to lend to “any individual partnership, or corporation” in “unusual and exigent circumstances.” The 2010 Act now compels the Fed to consult with the Secretary of the Treasury before implementing a new lending program.
Economic history Financial markets
Central Banks, financial crises, moral hazard, lender of last resort, bailout, bank runs, SIFIs, central banking, Banque de France
Walking back from Cyprus
Mitu Gulati, Lee C. Buchheit 20 March 2013
Eurozone leaders’ radical step of putting insured depositors in Cypriot banks in harm’s way was not their only option. This column argues that none of the alternatives were pleasant but some were less ominous.
On Friday 15 March 2013, European leaders trespassed on consecrated ground. They insisted that Cyprus impose losses – euphemistically dubbed a 'solidarity levy' – on insured depositors with Cypriot banks as a condition to receiving EZ/IMF bailout assistance. Entering Friday’s meeting, the leaders had four options on the table:
bailout, Eurozone crisis, EZ crisis, Cyprus
A no-further-bailouts principle
Tito Boeri 20 July 2012
Solving the EZ crisis will almost certainly involve some financial transfers in exchange for some loss of sovereignty. This column suggests a guiding principle for which policies should be under EZ control. Transfers of authority to supranational bodies must make a no-further-bailout clause credible.
Angela Merkel is right. There can’t be solidarity without control. She is also using the right words – “solidarity” and “control”.
Ireland, bailout, Greece, Eurozone crisis, Portugal
Greece’s 2nd bailout: Debt restructuring with no debt reduction?
Ricardo Cabral 29 July 2011
On 21 July 2011, the Council of the EU agreed to a second bailout for Greece. The deal was predicated on “private-sector involvement”. This column explores what this actually means. It estimates that the haircut for private bondholders may well be one-third of the figure initially proposed. It stresses that such uncertainties could spell more trouble for Greece and Europe as a whole.
The Council of the EU agreed on 21 July 2011 to a second bailout for Greece (Council 2011). This deal is predicated on “private-sector involvement”. The Council seems to have implicitly endorsed a form of private-sector involvement made by a private institution – the Institute of International Finance.
EU policies Europe's nations and regions
bailout, Greece, Eurozone crisis
Europe's €200 billion reverse wealth tax explained
Harald Hau 27 July 2011
Last week, the European heads of government added €109 billion to the existing €110 billion rescue plan for Greece. As Europe’s financial sector would have otherwise taken a huge hit, this column address the question: How did the financial sector manage to negotiate such a gigantic wealth transfer from the Eurozone taxpayer and the IMF to the richest 5% of people in the world?
When the deal was announced, German Chancellor Merkel highlighted the private-sector involvement. She stressed that this was the result of German intransigence. According to the spin, private creditors have to accept a 21% write-down on their claims. This amounts to a €37 billion private-sector contribution. They also provide €12.8 billion in new loans for debt buyback. This buyback, however, should not count as a private-sector contribution as it amounts to an exchange of one debt for another.
EU policies Europe's nations and regions International finance Poverty and income inequality
Ireland, bailout, Greece, Eurozone crisis, Portugal
The Eurozone debt crisis: Facts and myths
Charles Wyplosz 09 February 2010
The latest turn in the global financial crisis has ensnared the debt of some European nations. The fact that these nations are members of a monetary union has generated much confused comment. Here one the world’s leading experts on Eurozone monetary and financial matters sets the record straight, debunking 10 myths and setting forth 10 frequently overlooked facts.
Like any crisis, the new one generates myriads of misguided comments and reactions by journalists, financiers and policymakers. Ten myths that are frequently heard clash with ten facts that are frequently overlooked.
Myth 1: Greece is bankrupt. Countries cannot be bankrupt; their governments can only default on their debts. In the absence of internationally recognised resolution mechanisms, government defaults open up a messy situation as governments negotiate with their creditors.
Financial markets International finance
eurozone, bailout, Greece, Debt crisis
Will Geithner and Summers Succeed in Raiding the FDIC and Fed?
Jeffrey Sachs 25 March 2009
This column explains how the Geithner public-private scheme to buy toxic assets at inflated prices is – in expected value terms – a hidden subsidy to bank shareholders paid for by US taxpayers. If the toxic assets turn out to be good investments, there is no transfer, but if they turn out to be bad loans, the taxpayer is left holding the damage while the private investors walk away.
Geithner and Summers have now announced their plan to raid the Federal Deposit Insurance Corporation (FDIC) and Federal Reserve (Fed) to subsidize investors to buy toxic assets from the banks at inflated prices. If carried out, the result will be a massive transfer of wealth -- of perhaps hundreds of billions of dollars -- to bank shareholders from the taxpayers (who will absorb losses at the FDIC and Fed).
bailout, global crisis debate, Geithner plan
Money for nothing?
Johannes Van Biesebroeck 10 February 2009
Following the US bailout of the automotive industry, Canada is now bailing out its own auto firms, lest they risk southward migration. However, this column shows that this most recent action only continues a long history of lavish subsidies for the auto industry. Are governments giving away money for nothing?
On 21 December, 2008, the Canadian and Ontarian governments announced that they would provide the Canadian arms of General Motors and Chrysler with a combined $4 billion in loans. This represents 20% of a similar US aid package announced a day earlier by then-President Bush. As the firms have been flirting with bankruptcy, the “loan” terminology should not be taken too literally, and the widely used “bailout” is clearly the right term. This sudden influx of government support is not nearly as exceptional as often portrayed.
bailout, Car industry, Canada
The cost of resolving financial crises
Luc Laeven 31 October 2008
A new IMF database, which covers the universe of systemic banking crises from 1970 to 2007, shows that the average fiscal cost was about 15% of GDP, or three times the US’s $700 billion. This column points out that quick action often lowers the ultimate cost. Moreover wishful thinking teamed with regulatory forbearance and bank liquidity plans often raises the cost by delaying vital, but politically painful, government action.
The crisis is evolving with breakneck speed. The debate about why it happened and how it will unfold is still very much ongoing, as Felton and Reinhart (2008) show.
While it may be too early to write about the lessons learned, authorities do not have the luxury to wait for these, and have already embarked on large-scale interventions in the financial sector and beyond.
subprime crisis, financial crisis, bailout, fiscal cost
An international perspective on the US bailout
Frank Westermann, Romain Rancière, Aaron Tornell 20 October 2008
The current credit crisis has prompted many calls for regulation to prevent such an event from ever happening again. This column defends a financial system that engenders systemic risk. Economies that risk occasional credit crises enjoy higher long-run growth, and the cost of the US bailout is well within historical norms.
As the US economy is hit by the financial crisis and associated bailout costs, it is useful to take an international perspective on current events. In the last three decades, many developing countries have also experienced financial crises and large bailouts. Yet, the growth gains brought by financial liberalisation and deregulation have, in most cases, far more than offset the output and bailout costs of crises. Importantly, financial liberalisation by itself did not generate crises – government meddling and implicit bailout guarantees were often involved.
growth, financial crisis, bailout, financial liberalisation