When Banks Are Nationalized

Thanks to the fantastic and timely recent IMF paper and database on historical financial crises by Luc Laeven and Fabian Valencia, we can identify other instances in which a government took equity stakes in major banks as part of a recapitalization program.

This has happened five times since 1970, according to Laeven and Valencia: 

Sep-91 Dec-96 Nov-97 Aug-97 Oct-91 Recap cost to government (gross) (as % of GDP)

8.63% 13.90% 6.61% 19.31% 2.61% Recovery proceeds (% of GDP)

1.72% 4.95% 0.09% 3.50% 2.00% Recap cost to government (net) (as % of GDP)

6.91% 8.95% 6.52% 15.81% 0.61% Fiscal cost net (%GDP) 11.08% 38.95% 23.91% 23.20% 0.60% Output loss during period t to t+3 59.08% 30.08% 17.56% 50.10% 0.00%

In none of the cases did the government earn a profit from its move. The best return was in the case of Jamacia's 1996 crisis where the government earned 4.95 percent of GDP on the assets it had purchased, but the cost of the recapitalization was 13.90 percent of GDP.

Overall, total recapitalization costs ranged from 0.6 percent of GDP to 15.81 percent. For the US, that range translates into $85 billion to $2.2 trillion.

Total net fiscal costs ranged from 0.6 percent of GDP to 38.95 percent. For the US that ranges translates into $85 billion to $5.5 trillion.

Economic output loss over a three-year period following the onset of the crisis ranged from 0.0 percent to 59.08 percent.

In four out of the five cases, Laeven and Valencia point to financial liberalization as a key cause.