The cleansing effect of banking crises …

… is the title of an interesting post on the Voxeu website summarising some research conducted by a group of European academics.

I have only skimmed the research at this point but the conclusion that realising losses and restructuring banks sets the economy up for stronger growth seem intuitively logical. It is also a timely area of research at a time when there seems to be widespread concern that many so called “zombie” companies are only continuing to operate by virtue of extraordinary levels of liquidity and other financial support being injected into the financial system via central banks.

The post summarises their findings as follows …

Our findings show that restructuring of distressed banks during a crisis has positive long-term effects on productivity. We emphasise the importance of long-term productivity considerations in the design of optimal bank resolution mechanisms. Our results indicate that the challenge is the inherent trade-off between the short- and the long-term effects, which can complicate the political economy of the problem. For instance, in the short term, bailouts can look appealing to government officials, especially if the long-term costs bear less weight in their decision-making processes.

“The cleansing effect of banking crises”- Reint Gropp, Steven Ongena, Jörg Rocholl, Vahid Saadi; Voxeu – 7 August 200

Author: From the Outside

After working in the Australian banking system for close to four decades, I am taking some time out to write and reflect on what I have learned. My primary area of expertise is bank capital management but this blog aims to offer a bank insider's outside perspective on banking, capital, economics, finance and risk.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s