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International Banking Crises:
A Dossier
Mauro F. Guillén
Source: Luc Laeven and Fabian Valencia, “Systemic Banking Crises: A New Database.” IMF WP 08/224.
Frequency of Financial Crises
Twin crisis = banking + currency.
Triple crisis = banking + currency + sovereign debt.
Selected Banking CrisesCountry Initial
Year% Nonperforming
Loans at PeakGross Fiscal Cost
(% GDP)4-Year Output Loss
(% GDP)
Spain 1977 n.a. 5.6 2.2
Egypt 1980 n.a. 38.1 n.a.
Chile 1981 35.6 42.9 92.4
Senegal 1988 50.0 17.0 32.6
USA 1988 4.1 3.7 4.1
Sweden 1991 13.0 3.6 0.0
India 1993 20.0 n.a. 3.1
Brazil 1994 16.0 13.2 0.0
Mexico 1994 18.9 19.3 4.2
Japan 1997 35.0 24.0 17.6
Korea 1997 35.0 31.2 50.1
China 1998 20.0 18.0 36.8
Russia 1998 40.6 6.0 0.0
Turkey 2000 27.6 32.0 5.4
Argentina 2001 20.1 9.6 42.7Source: Luc Laeven and Fabian Valencia, “Systemic Banking Crises: A New Database.” IMF WP 08/224.
Source: Carmen M. Reinhardt and Kenneth S. Rogoff, “This Times is Different.” NBER WP 13882 (2008).
Sample: N=66.
Source: Carmen M. Reinhardt and Kenneth S. Rogoff, “This Times is Different.” NBER WP 13882 (2008).
Genesis of a Crisis
Scant Regulatory Oversight
Originate-and-Distribute
Model
Deterioration of Underwriting
Standards
MortgageSecuritization
Mispricing of Risk
Credit Default Swaps
Excess Global
Liquidity
CrisisExcessiveFinancialLeverage
LowInterestRates
Drive to Increase Investment Returns
Rising Real Estate Prices
© Mauro F. Guillén, The Wharton School.
Growing Importance of Finance
Note: Financial services and insurance accounted for 7.8% of U.S. GDP in 2006.
Housing Prices
Subprime Defaults
Mortgage Defaults by Country
Source: Analistas Financieros Internacionales, based on OECD data.
Debt
Leverage
Regulatory BalkanizationOffice of
Thrift Supervision
Federal Deposit
Insurance Corporation
Individual States
Department of Labor
Office of the Comptroller of the Currency
Federal Reserve
National Credit Union
Administration
Securities and Exchange
Commission
Commodity Futures Trading
Commission
Commercial Banks
Thrifts
Insurance Companies
Securities and
ExchangesFutures
Credit Unions
Industrial Loan
Companies
Bank Holding
Companies
Source: The New York Times, 5 October 2008, Sunday Business Section, p. 9.
Artist: Laura Gilbert. http://www.securitiesdocket.com/2008/10/04/the-zero-dollar-bill/
Possible Actions• Guarantees on deposits: most countries.• Lowering of reserve requirements.• Deposit freeze: e.g. Argentina ‘01.• Bank holiday.• Liquidity assistance.• Unloading of bad debt.• Insurance of bad debt.• Bank intervention & restructuring:
– e.g. Spain ’77, Sweden ‘91, Mexico ‘94 Japan ‘97, Korea ‘97, China ’98, Turkey ‘00.
• Bank liquidations:– e.g. Spain ‘77, Egypt ’80, Chile ’81, Senegal ‘88, USA ‘88, Sweden ‘91, Japan ’97, Korea
’97, Russia ’98, Turkey ‘00.
Stumbling Along
Activist Fed
Liquidity Assistance
So Far
• Countrywide [BoA].
• IndyMac [Gov’t].
• Washington Mutual [JPM].
• Wachovia [WF or Citi?].
• Freddie Mac [Gov’t].
• Fannie Mae [Gov’t].
• AIG [Gov’t].
• Bear Stearns [JPM].
• Merrill Lynch [BoA].
• Lehman Brothers.
• Goldman Sachs (*).
• Morgan Stanley (*).
• GE Capital (?).
(*) Turned into bank holding companies.
The Investment Banks
The Wall Street Tournament
Biggest Write-Downs
European Woes• Britain: Northern Rock, HBOS, Bradford & Bingley.
• France: Société Générale.
• Switzerland: UBS.
• Germany: IKB Deutsche Industriebank, Hypo Real Estate, the Landesbanks.
• Benelux: Fortis, Dexia.
• Italy: UniCredit.
• Spain: The small savings banks.
• Ireland: Bank of Ireland, Allied Irish Bank, and four others.
• Iceland: Glitnir Bank.
Resurgent Sun?• Sumitomo Mitsui Financial Group invested
$1 bn in Barclays.
• Mizuho invested $1bn in Merrill Lynch.
• Mitsubishi UFJ is paying:– $3.5 bn for 35% of UnionBanCal.– $8.4 bn for 20% of Morgan Stanley.
• Nomura has bought the Asian, European, and Middle Eastern divisions of Lehman.
Source: Sovereign Wealth Fund Institute.
Sovereign Funds to the Rescue
Barclays PLC Quatar Investment Authority 7.7 3,483
When the end of the world arrives, how will the media report it?
USA Today
WE’RE DEAD.
National Enquirer
O.J. AND NICOLE, TOGETHER AGAIN.
Wired
THE LAST NEW THING.
Rolling Stone
THE GRATEFUL DEAD REUNION TOUR.
Discover Magazine
HOW WILL THE EXTINCTION OF ALL LIFE AS WE KNOW IT AFFECT THE WAY WE VIEW THE COSMOS?
Inc. Magazine
TEN WAYS YOU CAN PROFIT FROM THE APOCALYPSE.
The Wall Street Journal
DOW JONES PLUMMETS AS WORLD ENDS.
The Economist
WORLD EXTINCT, CAPITALISM SURVIVES.