Soloviova O. O., Mudrenko A. A., Pikiner V. V.

Oles Honchar Dnipropetrovsk National University


Banking crisis is a rapid and massive deterioration in asset quality of a large number of commercial banks influenced by unfavorable factors which prevent the banking system from its perfoming.

Scholars define various measures to resolve systemic banking crises. Having analyzed some of them, we can single out the following basic approaches at the stage of crisis arising: debt relief and refusal to use coercive measures; nationalization of banks, their closing or merger; sale of bank assets; deposits insurance; asset management companies; using of monetary policy measures; recapitalization of banks, etc.

Each of these techniques helps to achieve a desirable result, namely the banking system recovery and the economic situation stabilization. It depends on what methods and how a country uses. Typically, countries use a combination of strategies to overcome a crisis, including government programs and market mechanisms. Success depends on a skillful and effective use of legal, regulatory, administrative and political institutions. It is also worth noting that politicians in countries with weak economic institutions should not expect to achieve the same level of results in financial restructuring as in more developed countries and it is necessary to develop mechanisms respectively, and understand that it may take much longer than expected to come out of recession.

The state's role should be balanced and not hinder market forces. Banking crises are divided into systemic, local or partial. Local banking crises are crises in the interbank lending market, mortgage market, car loan market, liquidity market, consumer loan market, etc.

Actions for taken to avert a banking crisis can be divided into two groups: there are the policy of crisis suppresion and the policy of crisis (prevention). As for the first group it can also be called a group of short-term actions, namely it is limited by such types of policies which do not foresee the creation of new institutions or new complex mechanisms. Economists include the following actions to this group: bank holidays, deposit freezing, government guarantees to depositors (blanket guarantee), support bank liquidity.

Each of these actions is motivated by adverse changes in bank conditions and choosing the correct anti-crisis policy will depend on the factors that have led to the crisis, or loss of depositors’ confidence because of the bank insolvency, or a chain reaction on the general economic crisis. Most commonly used among these listed activities are: to support bank liquidity and government guarantees to depositors, and such measures as deposit freezing and bank holidays are used less frequently.

Deposit freezing is a temporary government veto to banks to give depositors ahead of time their money from accounts or increase lending. In Ukraine, in 2008, deposit freezing was introduced for a period of 6 months. In general, this measure of banking crisis suppression has been used in about 12% of critical cases, but it is highly risky and destructive and depositors can suffer and therefore it should be used only on emergency.

Bank Holiday is a period then banks are closed for some time. Usually it doesn’t last long, about 5 days and measure is taken "buy time" until a clear strategy is developed. They have been used only in 10% of crisis cases of crisis, usually in combination with deposit freezing.

The main purpose of government guarantees is to restore resume depositors’ confidence and they can prevent the rapid capital outflow, but they are only effective when there is a high level of confidence in the government. The government guarantees are an act which is expensive, so they should only be used in very critical situations.

Liquidity support is obviously one of the most widely used primary measures of reaction to systemic crises. Usually it happens when the Central Bank refinancing loans, and all other refinancing options are exhausted. As a rule liquidity support is used together with government guarantees.

After reviewing all possible situations, we can conclude that most effective way is to find the source of the crisis and only then take some actions. So if problems emerge due to general economic collapse, the bank can provide grants and support it. If the bank's insolvency is caused by incompetent management, or banks are used for political interests, such control does not seem to be socially significant and therefore disconnection of the bank's current owners’ assets and transferring them to the new bank is clearly one of the best decisions.