Working Papers

Avoiding Disaster: Policies to Reduce the Risk of Banking Crises

Publication Number: ECESWP47-E

November, 2000

Author : Gerard Caprio and Maria S. Martinez Peria

Type : Working Papers

This paper reviews the existing evidence on the origins of banking crises, provides new results on the impact of government bank ownership on financial stability, and discusses policy options that can prevent and mitigate the consequences of banking crises. We find that government ownership of banks increases the likelihood and fiscal cost of crises, albeit the latter result is weak. Among the policies recommended to minimize the occurrence of crises, we highlight the importance of sound macroeconomic policies, adequate financial infrastructure, incentive compatible regulations, and limiting government interference in the banking sector.