Q&A: Seven Questions on Financial Crises: Perspectives from the Frontier of Research

• Author: Stijn Claessens, M. Ayhan Kose, Luc Laeven, and Fabián Valencia
• Pages: 7-9

7

December 2013

The 2007–09 global financial crisis witnessed colossal disrup-

tions in asset and credit markets, massive erosions of wealth,

and unprecedented numbers of bankruptcies. Six years after

the crisis began, its lingering effects are still visible in advanced

economies and emerging markets alike—this shows a clear need

to improve our understanding of financial crises. In their forth-

coming book, “Financial Crises: Causes, Consequences, and

Policy Responses,” Stijn Claessens, M. Ayhan Kose, Luc Laeven,

and Fabían Valencia provide a broad overview of the current

research and bring together a number of studies on the causes

and consequences of crises. This article provides brief answers to

seven commonly asked questions about financial crises in light

of the findings in their book.

Question 1. What are the main factors explaining

financial crises?

Financial cris es can stem from problems of the private or

public sectors’ balance sheet s and have domestic or external

origins. Irresp ective of its origins, a nancia l crisis is oen

an amalgam of e vents, including substantial changes in

credit volume and asset prices, s evere disruptions in nancial

intermediation, notably a reduction in t he supply of external

nancing, lar ge scale balance sheet problems, and oen a

need for substantial government and i nternational support.

Although crise s can be driven by a variety of factors, t hey

are oen preceded by asset and cred it booms. Busts, nancial

crises, and poor grow th oen follow such booms (Figure1).

Given these type s of associations, many theoretical a nd

empirical studies have recog nized the need to explain shar p

movements in asset and credit market s. ese studies have

been able to identify some proximate caus es, such as nancial

liberaliz ation, productivity gains, and a var iety of distor-

tions, such as weak super vision and regulation, underpriced

deposit insurance, a nd poorly designed safety nets. However,

many puzzles remain i n terms of what factors drive asset price

bubbles and credit booms in the r st place.

Question 2. What are the major types of financial crises?

It is useful to classi fy crises into four groups: currency

crises; sudden stops (in capital ows); debt crises; and

banking cr ises. While there are many common cause s, the

available literature ha s also identied specic theoretica l

factors and empirical deter minants of each type of crisis. It

has sometimes been di cult to transform the predictions of

theories into empirical appl ications, including practical ways

to identify crises . While it is easy, for example, to design

quantitative methods to identi fy currency crises and sudden

stops, the identication of debt and ban king crises remains

typical ly based on qualitative and judgmental method s.

e literature therefore employs a wide range of method s to

identify and clas sify crises.

While there are is sues with establishing a timel ine, it is

clear that nanci al crises are quite common and tend to

Seven Questions on Financial Crises: Perspectives from the

Frontier of Research

Stijn Claessens, M. Ayhan Kose, Luc Laeven, and Fabián Valencia

Q&A

(continued on page 8)

followed by financial crisis

followed by poor performance

followed by financial crisis or poor performance

0

20

40

60

80

100

Credit House Prices Both Neither

Figure 1: Coincidence of Financial Booms and Crises

(fraction of total, in percent)

Note: This graph, except in the last column, shows the percent of cases in which a

crisis or poor macroeconomic performance happened after a boom was observed (out

of the total number of cases where the boom occurred).

Source: Dell’ Ariccia and others (2013).