Effects And Bailout Costs Of Systemic Banking Crises In The Financial Crises

The sub-prime mortgage crisis in the USA leads to a global international financial crisis. The entire U.S. banking system is facing unprecedented difficulties. The financial markets cannot restore just relying on the market forces alone. So the governments make a series of measures to maintain the stability of the banking system. And this makes us thing about the costs of the rescue process, and the cost of each bailout measure. It's very sure that the cost of bailouts is extremely high. We will avoid these costs if we can prevent the crises. However, the financial crises are unavoidable in many cases, just like the economy cycle. In a sense, the crises even become a part of the economy. Under the combined effects of various factors, systemic banking crises break out suddenly and cannot be prevented. Then the remaining question is that how to rescue the crises effectively. That means restoring the banking system with the lowest cost. Scholars began to value financial crises bailout only from recent years. And there's not too much research about crises bailout.This paper explains the definitions of crises and bailout, and reviews the research literature in the past, summarized the findings about the impact of crises and bailout costs. Then the author uses existing data, selecting 41 systemic banking crises, from 1970 until now as a sample. It studies the effects to the economy and society of the crises, and costs of bailout during the systemic banking crises. In addition to many scholars'thought that the crises have had a great impact on the real economy, that is, the economic costs of the crises. The paper also explores the social costs of crises—the high inflation rate and severe unemployment problem during the crises, which resulting the decreasing in the level of social welfare.In order to rebuild the banking system's stability, the Government adopted a series of measures, which generated a lot of financial costs and lead to moral hazard, which many economists believe that the biggest cost in the bailout. This paper selects fiscal cost representing the economic cost of bailouts, and empirically studied the relationship between fiscal costs and bailout measures. The results show that direct rescuing measures are tending to add the fiscal crises, such as the government injection of liquidity. In the other way, the financial system's own guarantee system always cut the cost down, such as deposit insurance. Also, the time of rescuing is very important. If the government can take bailout measures at the early days of the crises to contain the crises development, which will reduce the fiscal costs effectively.