Carmen Reinhart of the University of Maryland talks to Romesh Vaitilingam about the sequencing of the cycle of debt build-ups – from private debt surges to banking crises to sovereign debt crises – and the four ‘deadly D’s’ that once again threaten many governments as a consequence of the current crisis – deficits, debt, downgrade and default. The interview was recorded at the Royal Economic Society’s annual conference at the University of Surrey in March 2010.
Linking banking crises and sovereign defaults in emerging markets
Irina Balteanu, Aitor Erce12 November 2014
The feedback loop between banking crises and sovereign debt crises has been at the heart of recent problems in the Eurozone. This column presents stylised facts on the mechanisms through which banking and sovereign crises combine and become ‘twin’ crises. The results point to systematic differences not only between ‘single’ and ‘twin’ crises, but also between different types of ‘twin’ episodes. The timing of ‘twin’ crises – which crisis comes first – is important for understanding their drivers, transmission channels, and economic consequences.
The feedback loop between fiscal and financial instability has been at the core of the recent turmoil in Europe (Acharya et al. 2014). In some countries, systemic banking crises triggered fiscal distress due to the magnitude of bank rescue operations (for example, in Ireland). In others, substantial sovereign debt tensions, leading to successive sovereign downgrades, severely weakened domestic financial systems (for example, in Greece).
Stijn Claessens talks to Viv Davies about the recent IMF book titled 'Global Crises: Causes, Consequences and Policy Responses', co-edited with M Ayhan Kose, Luc Laeven, and Fabian Valencia. The book provides a comprehensive overview of current research into financial crises and the policy lessons learned. They discuss crisis prevention and management, and the crisis in the Eurozone. The interview was recorded in April 2014.
A bank restructuring agency for the Eurozone – cleaning up the legacy losses
Thorsten Beck, Christoph Trebesch18 November 2013
Many Eurozone banks are still in a fragile state following the Global Crisis. This vulnerability will be highlighted as the ECB takes charge of bank supervision, and the EZ moves towards a banking union. This column proposes a Eurozone bank restructuring agency as a way to speed up the crisis resolution. This temporary, centralised agency would be in charge of restructuring viable and non-viable banks throughout the Eurozone. Solving the problem of legacy assets is a necessary step towards a banking union.
At the core of the Eurozone crisis is the deadly embrace between banks and governments. Sovereign fragility has led to pressure on banks’ balance sheets. The weak fiscal position of governments in many periphery countries, on the other hand, has led to delays in recognising bank problems and addressing them (Acharya et al., 2012). The situation, however, also has a political dimension, as regulators in many European countries have become too close to the regulated entities.
Luca Papi, Andrea F Presbitero, Alberto Zazzaro25 February 2013
The IMF’s role in past systemic banking crises has been hotly debated. Indeed, prominent intellectuals have criticised the Fund for creating or exacerbating crises. This column discusses new evidence showing that IMF lending programmes are in fact associated with a lower probability of banking crises occurring in future.
During the 1990s, the IMF’s lending policy has been blamed for imposing the economic recipes of the Washington Consensus on recipient countries. In particular, the liberalisation, privatisation and austerity programs urged by the IMF in Mexico, southeast Asian countries, Russia and Brazil during the dramatic crises of the 1990s are thought to have triggered massive capital outflows and severe banking crises (Stiglitz 2002).
The current crisis has triggered key changes in the European banking resolution regime that were long overdue. Banks’ bankruptcy legislation is changing rapidly in Europe, facilitating an orderly and speedy resolution of banks in distress.
Bank behaviour and risks in an interbank payment system after a major credit event
Evangelos Benos, Rod Garratt, Peter Zimmerman07 August 2012
How does a major credit event such as the failure of Lehman Brothers on 15 September 2008 influence the way banks send and receive payments to and from one another? And what are the associated risks and costs?
Payment systems (i.e. the means by which banks send and receive payments) require the use of banks’ liquidity. As such, economists and regulators alike are concerned about how banks might behave in a payment system following a major disruption. In a gross settlement payment system,1 banks can use liquidity from incoming payments to fund outgoing ones. This enables them to make payments without having to use their reserves or to borrow in the interbank money market. Banks maximise the degree of payment recycling when they coordinate their payments.
The curse of advanced economies in resolving banking crises
Luc Laeven, Fabian Valencia09 July 2012
Do advanced economies have an edge in resolving financial crises? This column shows that the record thus far supports the opposite view, with the average crisis lasting about twice as long as in developing and emerging market economies. It argues that macroeconomic stabilisation policies in advanced countries often delay the necessary financial restructuring.
Countries typically resort to a mix of policies to contain and resolve banking crises, ranging from macroeconomic stabilisation to financial sector restructuring policies and institutional reforms. However, despite many commonalities in the origins of crises (Reinhart and Rogoff 2009), existing crisis management strategies have been met with mixed success.
Policymakers and macroeconomists often remind us that banking crises are nothing new. This column, based on recent papers by Columbia professor Charles Calomiris, looks at the long-term record of banking crises and draws lessons for today.
Pundits, policymakers, and macroeconomists often remind us that banking crises are nothing new, an observation sometimes used to argue that crises are inherent to the business cycle or perhaps human nature itself. Charles Kindleberger (1973) and Hyman Minsky (1975) were prominent and powerful advocates of this view, where banking crises result from the propensities of market participants for irrational reactions and myopic foresight.
The global crisis and central banks in Latin America: Breaking with the past
Luis I. Jácome H.20 October 2009
Latin American central banks seem to have weathered the global crisis quite well. This column describes their policy responses and says they succeeded in lowering inflation, averting banking crises, and shortening the recession. It attributes their success to past reforms that created strong institutional foundations and effective policy frameworks.
Latin America has a history of recurrent financial crises that took a large toll on economic growth and fuelled social unrest. Frequently, these crises were triggered by exogenous shocks, which unveiled macroeconomic and/or financial weaknesses, leading to simultaneous banking and currency crises. Financial crises, thus, became a primary source of macroeconomic instability and a reason for social frustration, as vast groups of the population, in particular the poorest, often lost their jobs, real income, and savings.