Saturday, May 22, 2010


— Final direct cost of the crisis for taxpayers may remain below 1% of GDP in most developed countries. This is only a small fraction of original commitments and also much lower than initial gross expenditures.

— Somewhat surprisingly, in historical comparison the crisis may turn out to be one of the least costly on record. Initial outlays already totalled only half the average seen in previous banking crisis resolution schemes in developed countries, primarily thanks to decisive and bold action taken by public authorities and a speedy recovery of the world economy. Recovery rates, too, have not always been as high as in the recent crisis.

— Among the countries most affected by the crisis, direct fiscal costs are in the end unlikely to exceed 2% in the US and 1% in Germany, while banking-sector rescue programmes in France and the UK might possibly even return a net gain.

— Significant cross-country differences result from the diversity in the designs of the stabilisation programmes, participation rates and the timing of the exit from state support.

How do we define fiscal cost?
The fiscal costs of a financial crisis can be broadly divided into two categories: a) direct costs relating to equity injections, debt assumed by the state and asset guarantees as well as (emergency) liquidity support for financial institutions, and b) indirect costs arising from lower tax revenues and higher government spending as a result of a crisis-induced recession, but also including e.g. increased interest costs resulting from higher debt levels (and contingent liabilities). In this briefing, we will mainly focus our analysis on direct costs, excl. support by central banks.

Which banking sectors suffered most in the crisis?
Before turning to the actual analysis, it is useful to look at where the crisis played a significant role. Three different types of country can be distinguished as having been hit especially hard by financial sector losses (see chart 1): a) countries such as the US, UK and Ireland that had experienced a credit boom prior to 2007 and where banks had to face declining asset valuations (resulting in securities write-downs and loan losses); b) countries such as Belgium, the Netherlands, Switzerland and Iceland whose home market was not large enough for their ambitious domestic financial institutions which therefore often built up large exposures to structured products originated in other (mostly ―bubble‖) countries; and c) the special case of Germany where a substantial share of the banking sector had no viable (i.e. sufficiently profitable) business model and Landesbanks in particular engaged in ―credit substitute transactions‖, i.e. buying of securitised loans instead of direct lending.

To read the full report: FISCAL COST