Sunday, March 19, 2017

Lessons from Two Decades of Banking Crises (new paper by Arner, Avgouleas & Gibson)

"Overstating Moral Hazard: Lessons from Two Decades of Banking Crises"
Douglas Arner, Emilios Avgouleas and Evan Gibson (PhD 2015)
University of Hong Kong Faculty of Law Research Paper No 2017/003
March 2017, 76 pp
Abstract: Over the past two decades a variety of banking system rescue approaches have been used, including in the 1997 Asian financial crisis, the 2008 global financial crisis, and the 2010 European debt crisis. By analysing the resolution of these crises as well as the approach to addressing bad loans in the People’s Republic of China, this paper provides a new perspective on the common belief that bailouts are invariably harmful to public funds or excessively conducive to moral hazard. Depending on the form of bailout, bank restructuring, and fiscal backstop, resolutions can be an effective means to restore a banking system. This paper argues that in a systemic financial crisis, a combination of balance sheet restructuring and the use of asset management companies to deal with non-performing loans is often the best choice. However, a fully-fledged resolution that triggers the bail-in procedure remains the best approach for non-systemically important financial institution failures which take place outside of systemic crises, namely when the failure is idiosyncratic.  Click here to download the full paper.

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