Some Bank Facts

Investment Banking


Lessons From 124 Banking Blow-Ups

 The seizure of Washington Mutual may be the largest bank failure in United States history, but unfortunately, there’s nothing new about a national banking crisis.

In fact, a just-released report from the International Monetary Fund counts 124 banking crises in the last 27 years, in countries like Japan, Argentina and Britain.

Economists at Merrill Lynch looked at the report and summed up some of its most interesting findings. Among other things, it showed that the average fiscal cost — net of any recoveries down the road — related to managing a banking crisis is a substantial 13.3 percent of a country’s gross domestic product.


That doesn’t bode well for the idea, floated this week by Warren E. Buffett, among others, that United States taxpayers might actually see a profit on the current proposal to use $700 billion to buy troubled assets from financial firms.

“The government is highly unlikely to make a profit on any recapitalization program,” Alex Patelis, the Merrill economist, wrote in the report.

The average recovery rate in a banking crisis averaged just 18 percent of the gross costs.

A look at Japan’s financial crisis in the 1990s is instructive, the Merrill report said. Like the current American crisis, Japan’s banking turmoil included the rescue and disposal of home-loan companies and the bankruptcy of a big securities firm — although the crisis in the United States seems to be unfolding much faster than Japan’s, possibly accelerated by the magic of securitization.
Judging from previous crises, Merrill’s economists suggest that the United States should move quickly to declare certain banks “survivors” and put the others out of their misery.

Doing so, they said, would end the “who’s next?” game that has gummed up the credit markets:

The Asian crisis teaches us that it is imperative that U.S. policy makers tell us which financial institutions will survive; and which not. This could possibly involve blanket government guarantees to unfreeze money markets. Until this uncertainty is resolved, financial institutions will be reluctant to deal with each other.