Financial Crises: Taking Stock
IMF Blog, March 10, 2014
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Bibliographic details
- Authors: Stijn Claessens
- Published: March 10, 2014
Overview
- Author and date: Stijn Claessens, March 10, 2014.
- Context: A reflection six years after the 2007-09 global financial crisis, assessing causes, consequences, and policy responses.
- Core product discussed: A new book, “Financial Crises: Causes, Consequences, and Policy Responses” (co-edited with M. Ayhan Kose, Luc Laeven, and Fabian Valencia), which provides a comprehensive overview of research on financial crises and surveys policy lessons across banking, balance of payments, and sovereign debt crises.
Four key insights (findings)
- It is hard, but possible, to reduce the incidence of financial crises:
- Crises can have domestic or external origins and can stem from problems in the balance sheets of private or public sectors.
- Proximate causes identified include weak supervision and regulation, poorly timed and designed forms of financial liberalization, underpriced deposit insurance, and poorly designed safety nets.
- Policy response emphasis: new regulations, improved supervision, and other institutional reforms are of key importance.
- It is hard, but not impossible, to predict crises:
- Crises are driven by a variety of factors, making prediction of where and when they may strike tricky.
- Common precursors: booms in credit and asset markets, notably housing markets.
- Policy implication: design and use of macroprudential policies to mitigate such booms is a growing priority for policymakers.
- Financial crises often exact large economic costs:
- Typical crisis features: sharp drops in credit and asset prices, a severe reduction in the supply of external financing, and large-scale balance sheet problems.
- Macroeconomic consequences: recessions with large output losses are common across various types of crises.
- Persistence: growth eventually returns to its pre-crisis rate, but output tends to stay depressed for an extended period of time, especially following banking crises, with no catch-up, on average, to the pre-crisis trend in the medium term.
- Policies can make a big difference:
- Timing, mix, and depth of policy measures greatly influence real costs of crises.
- Expansionary macroeconomic policies:
- Can help avoid an even sharper contraction in activity.
- Can allow banks to recover more quickly and renew lending.
- Risk: may discourage more active restructuring of financial institutions, corporations, and households, and may delay structural reforms, potentially prolonging the crisis and depressing future growth.
- Use of guarantees on bank liabilities:
- Can contain liquidity pressures on banks upfront.
- Come with substantial fiscal contingencies.
- Direct capital injections:
- Impact the public purse upfront.
- Some resources can be recovered when public shareholdings are returned to private hands.
- Overall point: striking the right balance among policies, restructurings, and reforms determines fiscal and economic costs of a crisis.
Prevention and policy priorities
- Emphasis: Prevention is better than a cure.
- Practical policy priorities highlighted:
- Strengthen supervision and regulation.
- Improve design and timing of financial liberalization.
- Correct underpriced deposit insurance and poorly designed safety nets.
- Develop and deploy macroprudential frameworks to monitor and mitigate credit and asset booms.
Research contributions and resources in the book
- The book compiles a wealth of lessons on monitoring and reforming economies and financial systems to avoid crises.
- It introduces a comprehensive database covering various types of crises.
- It includes lessons from sovereign debt restructuring episodes.
- It provides a guide for future research, noting that much remains to be explored.
Source: Financial Crises: Taking Stock — Stijn Claessens, March 10, 2014.