Transcript Banking crises

Banking Crises
Fin254f: Spring 2010
Lecture notes 2.2a
Readings: Reinhart and
Rogoff(10)
Outline
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Bank run theory
Location and frequency of runs
Crises and financial liberalization
Capital flow “bonanzas”
Comovements
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Equity prices
Real estate
Capacity
Consequences
Types of Banking Crises
 Repressed
 Bank
runs
financial systems
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
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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)
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“Fire sale”/distressed/low prices
 Bank
can run out of assets and go
bankrupt
Two Cases
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Insolvent bank
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Solvent bank
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Bank was bankrupt anyway
Liabilities>Assets
“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
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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



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Equity prices
Real estate
Capacity
Consequences
Fraction of Time in Banking
Crisis (Independence(or 1800)
-> 2008)
 Tables
10.1 and 10.2
 Developing
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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
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France 11.5, Netherlands 1.9, Germany
6.6, UK 9.2, Canada 8.5, US 13
Frequency of Banking Crises
 Developing
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Nigeria 1, China 10, India 6, Egypt 3,
Japan 8, Singapore 1, Argentina 9, Brazil
11, Chile 7, Mexico 7
 Developed
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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

3
Arbitrary guess at global capital status
year moving average of countries with
banking crises
 Banking crises probabilities higher after
financial liberalization
Capital Flows and Banking
Crises
 Sustained
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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



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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
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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
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See table 10.9
Argentina (High 55, Low 4 ) % of GDP
Some types of bailouts payoff eventually
 GDP
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growth
Figure 10.4
 Central
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to measure
government revenue
Figure 10.6, 10.8
Government Debt
 Government
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debt levels, fig 10.10
Increase in Debt (100 = start)
Average 3 year increase to 186.3
Ignores state level debt
Summary
 Crisis
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are not limited to
The past
Emerging markets
 Pretty
common
 Patterns similar