The last 25 years have seen the resurgence of a problem of long historical standing: banking crises. While the general presence of a "banking system safety net" has typically prevented these modern crises from turning into the kinds of banking panics observed historically, they are nonetheless events of great significance. Caprio and Klingebiel (1997) identify 86 separate episodes of large scale bank insolvency or worse that have occurred since 1974. And, many of these episodes are of staggering enormity. For example, in the early 1980s, Argentina and Chile spent amounts equaling 55% and 42% of their GDP, respectively, on banking system bailouts. And, current estimates are that, in Thailand today, 60-70% of all loans are non-performing.1 The frequency and severity of these crises makes it essential to pose four questions: what causes banking crises?; what can be done to prevent them or, at least, to mitigate their severity?; what are the macroeconomic consequences of banking crises, and of the large bailouts that are often associated with them?; what are the social costs associated with the occurrence of a banking crisis? and what social costs or benefits are derived by injecting resources into banking system bailouts? This paper is an attempt to address these questions.
