and policy lessons for other CIS countries with similar institutional setup and legal frameworks for bank resolution. It can also prompt earlier reforms in this area in peer countries to ensure systemic risk events can be resolved according to best practice and to the benefit of the economies.

To gain new insights into the link between bank bailouts and fiscal costs, and to develop a tool for projecting fiscal contingent liabilities from bank bailouts, this paper draws on a rich history of various forms of staggered bailouts in Kazakhstan. It studies the link between bank bailouts and fiscal contingent liabilities using bank-level data for Kazakhstan. The paper first estimates the probability that a bank in distress is bailed out, conditioning on bank characteristics such as financial soundness (CAMEL indicators), ownership type (state, politically exposed persons, local, foreign), and systemic importance (size).<sup>e</sup> Second, it estimates the extent of bailout costs depending on the size of banks, their ownership type, financial soundness, and the type of bailout instrument used by the government. The latter aims to contrast the fiscal contingent liabilities when the government uses bailout instruments without taxpayer recourse on bank future profits—such as government purchases of bad loans at 100 percent of the nominal value—versus instruments that require banks to repay state financial support with appropriate compensation for the alternative fiscal costs—such as properly governed and priced senior debt or equity injections. Third, the paper illustrates how the estimations could be used for projecting the expected contingent liabilities from bank bailouts.

We find that larger banks are more likely to experience a bailout despite their business diversification and economies of scale. We surmise that moral hazard could be also one underlying explanation given the history of bailouts in Kazakhstan. Foreign-owned banks get bailed out much less than other domestic banks (keeping size constant). Similarly, banks owned by local politically exposed persons (PEPs) get resolved through private solutions much less than other domestic banks (keeping size constant)—perhaps owing to their better management, on the one hand, and preferential political/ business connections, on the other hand. Interestingly, consistent with the hypothesis of soft budget constraints of state-owned businesses, ownership by the state significantly increases the likelihood that public money will be deployed to stabilize troubled banks.

Our estimations confirm that bigger banks in distress are more costly to stabilize. But we also find that if a troubled bank is state-owned, the bailout cost increases, on average, by 10 billion tenge. Moreover, if the applied bailout instrument is a debt financing of the distressed bank, the public expenditure increases relative to using an equity injection by, on average, 39 billion tenge. The costliest by far are bailouts using purchases of non-performing loans in which case the relative cost hikes, on average, by 324 billion tenge. The significance of the variables controlling for bank financial soundness—in particular, capitalization, provisioning, and profitability—confirms that sounder banks are much less costly to stabilize (rehabilitate), highlighting the importance of independent and credible supervision of banks.

> e CAMEL is an abbreviation for Capitalization, Asset quality, Management, Earnings, and Liquidity capturing a useful supervisory framework that has been used by many countries around the world to monitor bank financial soundness. See more discussion of this framework in the data section.

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