The US may finally manage to cobble together another version of the $700 billion bailout package, but the big question is whether that’s good enough. Nouriel Roubini, the economics professor at the Stern School of Business at New York University who first talked of the likelihood of the banking crisis and big banks going under, for instance, thinks the cost will be more likely to be around $1.7 trillion. A working paper on the IMF website by Luc Laeven and Fabian Valencia (both affiliated with the IMF though the views are not necessarily those of the IMF) has analysed all systemic banking crises from 1970-2007 – there were 124 banking crises in this period, 208 currency crises, 63 sovereign debt defaults/restructuring, 42 twin crises (banking and currency crises in succession) and 10 triple ones (banking, currency and defaults in succession). In most banking crises, emergency/blanket liquidity support and taking over of banks like the US is doing are par for the course. The time for which such support has to be given varies across countries. What’s interesting, the paper points out, fiscal costs, net of recoveries, average around 13.3 per cent of GDP (around three times the size of the current US package) and can be as high as 55.1 per cent of GDP. Output losses tend to be around 20 per cent of GDP per year for four years but can be as high as 98 per cent. In other words, there’s still a lot of pain out there.
| Cost of banking crisis | ||||
| Country | Starting date of banking crisis | Share of NPLs at peak (%) | Gross fiscal cost (% of GDP) | Output loss (% of GDP) |
| Argentina | 2001 | 20.10 | 9.60 | 42.70 |
| Brazil | 1994 | 16.00 | 13.20 | 0.00 |
| Chile | 1981 | 35.60 | 42.90 | 92.40 |
| China | 1998 | 20.00 | 18.00 | 36.80 |
| India | 1993 | 20.00 | — | 3.10 |
| Indonesia | 1997 | 32.50 | 56.80 | 67.90 |
| Japan | 1997 | 35.00 | 24.00 | 17.60 |
| Malaysia | 1997 | 30.00 | 16.40 | 50.00 |
| Mexico | 1994 | 18.90 | 19.30 | 4.20 |
| Russia | 1998 | 40.00 | 6.00 | 0.00 |
| Thailand | 1997 | 33.00 | 43.80 | 97.70 |
| United States | 1988 | 4.10 | 3.70 | 4.10 |