Or, if emergency liquidity assistance was provided at some point during the course of the crisis (on the erroneous assumption that the bank was basically solvent), a loan loss may be incurred on the national central bank that acted as a lender of last resort. And, of course, when giving liquidity support to a bank with cross-border operations in many countries, you can never be entirely sure in what jurisdiction your money ends up. In the case of a branch structure, it may end up in any country in which the bank operates, and ring-fencing a subsidiary may prove equally difficult in practice. Furthermore, in some situations it may be socially optimal to spend public money in order to reconstruct a failed bank. If the reconstruction is successful, the money spent may eventually be recovered by the public. But it could take a considerable amount of time before this happens, and a precondition is that you are not betting on the wrong horse. The taxpayers in one country may not be so keen to take on such risks in another country. In addition to fiscal costs, there may of course be substantial indirect social costs in the form of a dipping GDP that may occur when the financial system is suffering efficiency losses or is being temporarily disabled as a result of a financial crisis. These indirect costs are basically a function of the systemic relevance of the financial institution(s) in question.
In both cases, government debt increases. The ultimate cost of a major banking crisis is therefore likely to hit the taxpayers in one way or the other. So, any deposit guarantee scheme will in practice contain an element of a government guarantee, which could be either implicit or explicit. In the case of a cross-border bank with branches in other countries, the important question is, of course, how far the taxpayers in the home country would be willing to go in order to bail out the depositors in the host countries. This could entail substantial cross-border transfers, which is something that most politicians tend to view with considerable scepticism. There are also challenges in the potential reconstruction of a failing cross-border bank. A reconstruction of a cross-border bank will increasingly impact the financial system in the other countries where the bank has major activities. To achieve a successful reconstruction, coordination of the activities of the authorities in the different countries would therefore be essential. In addition, as banks merge cross-border, some banks tend to grow in size to the extent that it will be very difficult for a small country to save the entire group. Traditionally there has been a fear that banks are becoming “too big to fail” because of their critical importance for the stability of the financial system. For a small country, which is home to a large bank with an extensive network of foreign branches, there is a real risk that the bank will rather be “too big to save”.