While there are commonalities between the recent financial crisis and past crises both in terms of underlying causes and policy responses, the scale and scope of interventions differ. Direct fiscal costs to support the financial sector were smaller this time as a consequence of swift policy action and significant indirect support from expansionary monetary and fiscal policy, the widespread use of guarantees on liabilities, and direct purchases of assets. While these policies have reduced the real impact of the current crisis, they have increased the burden of public debt and the size of government contingent liabilities, raising concerns about fiscal sustainability in some countries.
The global financial crisis that started in the United States in 2007 has resulted in systemically important banking crises and large output losses in a number of countries despite extraordinary policy interventions.
With the recovery from this crisis under way, questions about its causes, consequences, and resolution naturally arise.
The underlying causes of the recent crisis are still being debated, though there appears to be broad agreement that financial innovation in the form of asset securitization, government policies to increase home ownership, global imbalances, and lax monetary policy were all contributing factors to the buildup of vulnerabilities and the unfolding of the crisis (De Nicoló and others, 2010; Keys and others, 2010; Obstfeld and Rogoff, 2009; and Taylor, 2009).
A number of papers have documented stylized facts about banking crises. Caprio and others (2005) present a database on systemic and nonsystemic banking distress episodes, focusing on the costs of the crises; Duttagupta and Cashin (2008) analyze factors that generally precede a banking crisis; Laeven and Valencia (2008) improve upon existing data by adding detailed information on policy responses during systemic banking crises; and Reinhart and Rogoff (2009) present an analysis of the stages of financial crises (banking, currency, and sovereign) with data going back to the 1800s. Laeven and Valencia (2010) present new and comprehensive data on the starting dates and characteristics of systemic banking crises over the period from 1970–2009, including detailed information on policy interventions. An uncontroversial definition of a systemic banking crisis is a situation where a large fraction of banking system capital has been depleted (Caprio and others, 2005; Laeven and Valencia, 2008; and Reinhart and Rogoff, 2009). However, implementing this definition implies relying on qualitative information, given the difficulty in measuring economic losses. Laeven and Valencia (2010) propose a crisis definition based on the range and scale of policy interventions that improves upon this qualitative strategy.
Laeven and Valencia (2010)’s definition requires the fulfillment of two conditions: significant signs of financial distress in the banking system (i.e., significant bank runs, losses, and liquidations) and significant banking policy intervention measures in response to losses in the banking system, where the last component is satisfied when at least three of six conditions are met: significant liquidity support, guarantees on bank liabilities, asset purchases, nationalizations, restructuring costs, and deposit freezes and bank holidays (see Laeven and Valencia, 2010, for definitions). The year that both criteria are met marks the beginning of a systemic banking crisis.
Based on this definition, 13 countries experienced a systemic banking crisis during 2007–09: Austria, Belgium, Denmark, Germany, Iceland, Ireland, Latvia, Luxembourg, Mongolia, the Netherlands, Ukraine, United Kingdom, and the United States. Ten additional countries are listed as borderline cases, representing episodes where the definition is almost met: France, Greece, Hungary, Kazakhstan, Portugal, Russia, Slovenia, Spain, Sweden, and Switzerland. Several other countries also announced policy packages in response to the crisis, but usage of those packages was small or policy actions were not significant enough to meet the criteria. Some of the borderline cases (notably Greece) have since taken systemic proportions.
Caprio, Gerard, Daniela Klingebiel, Luc Laeven, and Guillermo Noguera, 2005, “Banking Crisis Database,” in Systemic Financial Crises: Containment and Resolution, ed. by Patrick Honohan and Luc Laeven (Cambridge, U.K.: Cambridge University Press).
De Nicoló, Gianni, Giovanni Dell’Ariccia, Luc Laeven, and Fabian Valencia, 2010, “Monetary Policy and Bank Risk Taking,” IMF Staff Position Note 09/10.
Honohan, Patrick, and Luc Laeven (eds.), 2005, Systemic Financial Crises: Containment and Resolution (Cambridge, U.K.: Cambridge University Press).
Keys, Benjamin, Tanmoy Mukherjee, Amit Seru, and Vikrant Vig, 2010. “Did Securitization Lead to Lax Screening? Evidence from Subprime Loans,” Quarterly Journal of Economics, Vol. 125, No. 125, pp. 307–62.
Laeven, Luc, and Fabian Valencia, 2010, “Resolution of Banking Crises: The Good, the Bad, and the Ugly” IMF Working Paper 10/146.
Obstfeld, Maurice, and Kenneth Rogoff, 2009, “Global Imbalances and the Financial Crisis: Products of Common Causes” (unpublished; Harvard University).
Reinhart, Carmen, and Kenneth Rogoff, 2009, This Time is Different: Eight Centuries of Financial Folly (Princeton, NJ: Princeton University Press).
Taylor, John, 2009, Getting Off Track: How Government Actions and Interventions Caused, Prolonged, and Worsened the Financial Crisis (Stanford, CA: Hoover Press).