How To Deal With Failed Banks

2019-03-14T09:56:10-04:00July 3, 2018|

By Deniz Igan

July 3, 2018

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Reforms since the global financial crisis have made bail-ins a credible option and bail-outs less likely (photo: iStock by Getty Images)

During the global financial crisis, policymakers faced a steep trade-off in handling bank failures. Using public funds to rescue failing banks (bail-outs) could weaken market discipline and lead to excessive risk taking—the moral hazard effect. […]

A Tale of Titans: The Too Important to Fail Conundrum

2017-04-15T14:22:14-04:00May 27, 2011|

Folklore is riddled with tales of a lone actor undoing a titan: David and Goliath; Heracles and Atlas; Jack and the Beanstalk, to name a few. Financial institutions seen as too important to fail have become even larger and more complex since the global crisis. We need look no further than the example of investment bank Lehman Brothers to understand how one financial institution’s failure can threaten the global financial system and create devastating effects to economies around the world. We’ve been looking at how to fix the too important to fail problem, and favor market based measures to help reduce the likelihood and impact of a failure. Global regulators have come up with a new set of tighter rules for all banks, known as Basel III, as a starting point to make the system less risky and address a number of regulatory issues. Implementation may take several years, however, while systemic institutions continue to grow in size and complexity, and may resume their risky practices. So in the interim, we’d like to see rapid, credible, and visible actions.

Learning from the Crisis: Future IMF Lending Role

2017-04-15T14:37:43-04:00April 22, 2010|

The IMF resource base needs to be adequate to deal with most shocks. Some observers, however, worry that a large IMF with beefed-up financing instruments would add to moral hazard, encouraging reckless lending or unsafe policies. This is less of an issue when IMF lending is targeted to deal with “exogenous” shocks, i.e., shocks that cannot be influenced by the behavior of the individual country or its creditors.
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