Interconnected nature of crises
Rich literature on banking crises – but there’s systematic relationship between banking and currency crises
Banking crises typically came after financial liberalization
125 countries, 300 banking crises = tight connection between capital market integration (open capital account) and incidences of banking crises
In era of heavy regulation, relative dearth of financial crises
Before, currency and banking crises were looked at in isolation
But, banking crises often lead to future currency problems – feedback loops
A legacy of banking crises is that governments end up with a lot of debt – takes over private debts / bank debts
Banking crisis increases probability of sovereign debt crisis – but not other way around
Pattern of steps
1. Financial liberalization
2. Boom in economic activity, asset prices
3. Slowdown / onset of banking problems
4. Bank crisis
5. Sovereign debt crisis
How to measure severity of crisis – look at per/capita GDP, and number of years required to return to pre-crisis peak
Most severe 100 crises, ranked – lots of triple crises (bank, currency, sovereign debt)
Antecedents of financial crises
-currency overvaluation – bad loans, firm over-profitability
-asset price bubbles
-credit boom
-build up of short-term debt
-decline of bank deposits / existence of bank runs
-hidden debts – all kinds of nasty surprises are revealed during crises
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Post crises recessions are longer and more protracted than norm
Even by 2018, countries like Italy and Greece still had not returned to pre-crisis peaks (re: 2008 financial crisis)
Legacy of these crises is build-up of public sector debt
Advanced economies are no strangers to sovereign default…not even world powers