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 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 oen
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 oen a
need for substantial government and i nternational support.
Although crise s can be driven by a variety of factors, t hey
are oen preceded by asset and cred it booms. Busts, nancial
crises, and poor grow th oen follow such booms (Figure1).
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 identied specic 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 identication 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
(continued on page 8)
followed by ﬁnancial crisis
followed by poor performance
followed by ﬁnancial crisis or poor performance
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).