## Financial Crises: Taking Stock

_IMF Blog, March 10, 2014_

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## Bibliographic details
- Authors: Stijn Claessens
- Published: March 10, 2014

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### 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.*

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_Source: https://www.imf.org/en/blogs/articles/2014/03/10/financial-crises-taking-stock_