Cost of Banking Crises

1. Cost of Banking Crises Dr.Nikola Fabris The Central Bank of Montenegro

2. Crises • Crises repeat through economic history • They are hard to predict, but they always cost a lot • Banking business is very sensitive – a small bank's bankruptcy may lead to a chain effect • Current crisis is probably the biggest one after the Great Depression The Central Bank of Montenegro

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4. Cost of resolving the crisis • In normal times, of 1,000 financial institutions, some 960, on average, survive through year: • Of the remaining forty institutions, thirty-four join some other financial institution, through takeover or merger, and six end up being under bankruptcy or liquidation • Faced with the crisis, economic and monetary policy creators must take certain measures, but also consider their effects on future development The Central Bank of Montenegro

5. Cost of resolving banking crises The Central Bank of Montenegro

6. Cost of banking crises in small economies • A number of studies have addressed this issue; • Professional literature often treats them at the global level, in advanced countries and emerging economies, but small countries have been rather neglected; • The cost of resolving the crises and recapitalizing banks can be enormous; • An overview of selected studies on costs of banking crises is shown next The Central Bank of Montenegro

7. Cost of banking crisis Average costs The Central Bank of Montenegro

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11. Fiscal cost (% of GDP) in small economies The Central Bank of Montenegro

12. Output loss (% of GDP) in small economies The Central Bank of Montenegro

13. Origins of systemic banking crises • Usually, first comes a microeconomic or macroeconomic shock • In small, open economies, the crisis can be imported • The crisis usually hits the weakest link in the chain • It first appears as liquidity problem • Withdrawal of deposits • Panic and spreading to other banks The Central Bank of Montenegro

14. Banking crises in small economies • Small economies are susceptible to banking crises as big economies; • Due to their high degree of openness, small economies are also susceptible to external shocks; • Small economies that can be rather exposed are those having disproportionally large financial assets in comparison with GDP; • Limited resources in small economies hinder banking crisis resolution; • Timely response is important, otherwise costs of resolution progressively increase. The Central Bank of Montenegro

15. Banking crises in small economies • Focus should be put on the prevention of any factor that could lead to the crisis emergence; • Appropriate banking supervision; • Legislation; • Protection of depositors. The Central Bank of Montenegro

16. Crisis origins The Central Bank of Montenegro

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18. Conclusion • Modern world is characterized by occasional banking crises and it is unlikely that their recurrence in the future will be prevented; • Crises entail large costs; • Preventive actions with regard to all factors that could lead to a crisis emergence; • When a crisis has occurred, the cost of its resolution progressively increase. The Central Bank of Montenegro