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

Types of Banking Crises
 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
 What is a bank?

Policies to Stop Runs
 Deposit insurance
 Larger banks bailout smaller ones
 Clever temporary mergers
 Direct government assistance

Banks and Recessions
 Pretty strong connections

Bernanke, 1930s

1/2 of all US banks fail
 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

Capital Flows and Banking
Crises
 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

Comovements:
House Prices and Bank Crises
 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
 Figure 10.3: Number of banks around great depression
 1976-1985: US Financial/GDP = 4.9%
 1996-2005: US Financial/GDP = 7.5%

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

Figure 10.4
 Central government revenue

Figure 10.6, 10.8

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