Banking Crises - Fin254f: Spring 2010
- Lecture notes 2.2a
- Readings: Reinhart and Rogoff(10)
Outline - Bank run theory
- Location and frequency of runs
- Crises and financial liberalization
- Capital flow “bonanzas”
- Comovements
- Equity prices
- Real estate
- Capacity
- Consequences
- Repressed financial systems
- Bank runs
Repressed Financial Systems (Emerging markets) - Developing countries
- Government controls most banking
- Force consumers to save at banks
- Force banks to buy government debt
- Government defaults
- Wipes out depositors
Bank Runs (Anywhere) - What is a bank?
- Bank
- Borrows short term (deposits)
- Lends long term (assets/loan portfolio)
- Investment banks, Shadow banking, hedge funds …
Classic Bank Run - Depositors lose confidence
- Withdraw funds
- Banks forced to sell assets (loan portfolio)
- “Fire sale”/distressed/low prices
- Bank can run out of assets and go bankrupt
Two Cases - Insolvent bank
- Bank was bankrupt anyway
- Liabilities>Assets
- Solvent bank
- “liquidity crises”
- Can’t cover short term debt, but basically has good loans (assets)
- Can still be shut down
- Bad economic disruption
- Which one is difficult to tell
One Last Question - Deposit insurance
- Larger banks bailout smaller ones
- Clever temporary mergers
- Direct government assistance
Banks and Recessions - Pretty strong connections
- Credit constrained models, or credit channel models of business cycles
Outline - Bank run theory
- Location and frequency of runs
- Crises and financial liberalization
- Capital flow “bonanzas”
- Comovements
- Equity prices
- Real estate
- Capacity
- Consequences
Fraction of Time in Banking Crisis (Independence(or 1800) -> 2008) - Tables 10.1 and 10.2
- Developing
- Kenya 19.6%,Nigeria 10.2, Zambia 2.2, Argentina 8.8, Russia 1.0 Mexico 9.7, China 9.1, Japan, 8.1, Singapore, 2.3, India 8.6
- Developed
- France 11.5, Netherlands 1.9, Germany 6.6, UK 9.2, Canada 8.5, US 13
Frequency of Banking Crises - Developing
- Nigeria 1, China 10, India 6, Egypt 3, Japan 8, Singapore 1, Argentina 9, Brazil 11, Chile 7, Mexico 7
- Developed
- Germany 8, Greece 2, UK 12, France 15, US 13, Canada 8, New Zealand 1
Summary - Both developed and developing countries
- All regions
Crises and Liberalization - Figure 10.1
- Obstfeld-Taylor index of capital mobility
- Arbitrary guess at global capital status
- 3 year moving average of countries with banking crises
- Banking crises probabilities higher after financial liberalization
- Sustained capital inflow
- “Capital Bonanza”
- Three year inflows before crisis
- Cutoff at 20 percentile (for each country)
- Over threshold then Bonanza
Banking Crises and Bonanza’s - Table 10.7
- Prob(Crises) = 0.132
- Prob(Crises | Bonanza) = 0.184
- Share of countries where conditional prob is greater than unconditional = 0.609
Outline - Bank run theory
- Location and frequency of runs
- Crises and financial liberalization
- Capital flow “bonanzas”
- Comovements
- Equity prices
- Real estate
- Capacity
- Consequences
- Table 10.8
- House price cycles coincide with banking crisis years
- Magnitudes in price declines similar between developed and developing countries
Comovements: Equity Prices and Bank Crises - Figure 10.2
- Peak in year t-1
- Recovery started by t+2, nearly full recovery by t+3
- Much shorter than real estate
- Two recent examples of “no crisis” stock market movements
- Crash of 87
- IT bubble in 2001
Comovements: Equity Prices and Bank Crises Outline - Bank run theory
- Location and frequency of runs
- Crises and financial liberalization
- Capital flow “bonanzas”
- Comovements
- Equity prices
- Real estate
- Capacity
- Consequences
Bailout Costs - Difficult to measure
- See table 10.9
- Argentina (High 55, Low 4 ) % of GDP
- Some types of bailouts payoff eventually
- GDP growth
- Central government revenue
Government Debt - Government debt levels, fig 10.10
- Increase in Debt (100 = start)
- Average 3 year increase to 186.3
- Ignores state level debt
Summary - Crisis are not limited to
- The past
- Emerging markets
- Pretty common
- Patterns similar
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