Responding to Banking Crises : Capital Controls and Public Support to Banks

This paper analyzes banking crises using a quantitative model with equilibrium default for both firms and banks. The main results are: 1) small open economies have larger banking crises than closed or large economies. Constant international rates do not mitigate interbank spreads and amplify financial accelerators; 2) During crises, public support for banks entails government losses. It can be socially beneficial depending on the borrowing rate of the government, and on the elasticity of labor supply that controls the distortions caused by taxation; 3) In a crisis, capital controls can replace funding support to banks