Fiscal buffers against banking crisis risk

Claudio Borio, Juan Contreras, Fabrizio Zampolli

2019-07-04 - We compute fiscal buffers against the risk of a banking crisis. First, we use a cross-section of banking crises to identify the risk factors that predict the post-crisis increase in public debt – a proxy for the overall fiscal cost of a crisis. Next, we use these risk factors to compute country-specific distributions of the fiscal loss given a crisis. We find that the level and growth of credit to the private non-financial sector, foreign exchange reserves and the ratio of bank capital to assets are significant and robust predictors. Required fiscal buffers are sizeable: for most countries, the estimated mean fiscal loss ranges from 5 to 30% of GDP; at the 95th percentile, losses are between 30 and 50% in most advanced economies and between 20 and 40% for most emerging market economies. Those liabilities also imply that common tests of fiscal sustainability fail once the fiscal costs of banking crisis are included in the analysis.