Systemic financial crises have had devastating effects on economic growth and poverty as the 2007 crises has amply illustrated. Although crises have occurred throughout history, they have been more frequent in the past quarter century, affecting all types of countries. Conspicuous examples include the Nordic countries in the early 1990s, most Transition economies in the 1990s (though for Transition economies, financial distress and structural problems had been longer term phenomena), Mexico in 1995-95, East Asia (especially Korea, Indonesia and Thailand) after 1997, Turkey after 2000, and Argentina since 2001.
Fiscal costs of the crises in emerging markets in the 1980s and 1990s topped $1 trillion -- equal to total foreign assistance to developing countries over the 1950-2001 period.
Although the onset of a crisis can be hard to predict, good policies can help reduce the frequency of crises and minimize the costs when they do occur.
The focus of the World Bank’s research in this subtopic has been twofold:
~ to document and interpret the variety of crisis types and how they evolve.
~ to identify the financial sector policies most likely to reduce the frequency of crises.
~ to determine optimal crisis management and resolution strategies.
We studied the determinants and resolution policies of financial crises. The questions we studied included the following:
What are the features of an economic environment that tend to lead to banking crises and what explains the incidence of banking crises?
Can banking crises be predicted?
What are optimal resolution policies in the early phase of a crisis? What are the costs and benefits of an unlimited guarantee and unlimited liquidity support?
What type of financial restructuring policies have proven to be successful? How should government support to weak banks be structured?
What should be the sequence of bank and corporate restructuring? Who should be the lead agent in the restructuring process?
The research led to a better understanding of what strategies and policies would be beneficial in detecting crises early and resolving crises effectively at limited costs to the government and limited overall economic repercussions.
- Patrick Honohan
The effort led to a volume Systemic Financial Distress: Containment and Resolution (Cambridge University Press, 2005) which, drawing on a conference held in October 2003, considers the strengths and weaknesses of the various policy options for dealing with crises. It also includes the latest version of the Bank’s systemic crisis database describing 116 systemic crises in almost one hundred countries, as well as fifty borderline or nonsystemic events.
The current distress of large international banks in the US and Europe is spurring a rethinking of banking system regulations both in rich countries and in emerging markets. Asli Demirguc-Kunt, Senior Research Manager for Finance and Private Sector Development in the World Bank’s Development Research Group, has offered her thoughts on some of today’s most pressing questions on the following Q&A: How to Bring Banks Back to Life: Q&A with Asli Demirguc-Kunt.
Read about the implications of our research for the latest crises:
We also held conferences on the recent financial crises. See below for agendas and papers:
A conference on The International Financial Crisis: Have the Rules of Finance Changed?, co-sponsored by the Federal Reserve Bank of Chicago and the World Bank, took place on September 24, 2009 to September 25, 2009 to examine the recent global financial upheaval, whether financial principles seem to have shifted in recent years, and what that may mean for international financial markets and regulation.
A conference on Managing Systemic Crises and Redesigning Financial Systems was held on May 26, 2009. Jointly sponsored by the World Bank and the International Monetary Fund, the conference explored issues of regulatory reform and corporate and financial restructuring in the wake of financial crises.
Conference on Risk Analysis and Management A conference on risk analysis and management, jointly with the IMF, was held on October 2-3, 2008. Also a special issue of the Journal of Banking and Finance Volume 33, Issue 11, Pages 1949-2174 (November 2009) was published on the same topic.
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