A Balance Sheet Approach to Financial Crisis

IMF Working Papers, December 1, 2002

Source details

Authors: Brad Setser, Nouriel Roubini, Christian Keller, Mark Allen, Christoph B. Rosenberg
Published: December 1, 2002
Series: IMF Working Papers
DOI: https://doi.org/10.5089/9781451957150.001

Lays out an analytical framework for understanding crises in emerging markets based on examination of stock variables in:
- the aggregate balance sheet of a country, and
- the balance sheets of its main sectors (assets and liabilities).
Focuses on risks created by:
- maturity mismatches,
- currency mismatches, and
- capital structure mismatches.
Draws attention to vulnerabilities created by debts among residents, particularly debts denominated in foreign currency.
Explains transmission: problems in one sector can spill over into other sectors and eventually trigger an external balance of payments crisis.

Emphasizes the importance of analyzing stock (balance sheet) variables rather than only flow measures for crisis diagnosis.
Identifies specific sources of vulnerability:
- currency-denominated debt held by residents,
- maturity mismatches (short-term liabilities versus longer-term assets),
- unfavorable capital structure (e.g., reliance on short-term or foreign-currency funding).
Highlights cross-sector spillovers as a mechanism by which sectoral problems escalate into broader external crises.

Discusses the potential of macroeconomic policies to mitigate the cost of a balance-sheet-driven crisis.
Considers the role of official intervention in crisis mitigation and cost reduction.
Implicit policy priorities based on the framework:
- monitor and manage currency and maturity mismatches across sectors;
- address resident foreign-currency indebtedness vulnerabilities;
- strengthen balance-sheet resilience to limit spillovers across sectors.