Financial Crises: Explanations, Types and Implications

Book Review

The “Great Trade Collapse” triggered by the 2008-09 crisis calls for a careful assessment of the trade losses from financial crises. We adopt a more detailed perspective by looking at the response of different types of trade (i.e. agricultural, mining, and manufactured goods, and services) following various types of financial crises (i.e. debt, banking, and currency crises). Estimations performed on the 1980-2018 period using a combination of impact assessment and local projections to capture a causal dynamic effect running from financial crises to the trade activity show that the collapse of total trade is long-lasting and mainly driven by the fall of manufacturing and to some extent services trade. These causal effects are found to operate through three channels: a structural, a demand-side, and a supply-side channel. By contributing to the understanding of the trade effects of financial crises, our analysis provides insightful support for the design and implementation of policies aimed at coping with these effects.

Financial Crises and Human Development

This paper examines whether financial crises affect the likelihood that a central bank governor will be replaced. Employing a conditional fixed effects logit model for 101 countries during the period 1970–2007, we find that financial crises significantly increase the likelihood of a central bank governor turnover. When we decompose crises into banking, currency, and debt crises we find that banking crises and debt crises significantly increase the likelihood that a central bank governor will be replaced. Our results also suggest that financial crises increase the probability that a non‐government ally will be appointed as new central bank governor. Copyright © 2014 John Wiley & Sons, Ltd.

There are two types of financial crises: 1) Exogenous types arising first in the real economy and then transferring to the financial markets, and 2) Endogenous types arising within the financial markets themselves (and then potentially transferring to real economies depending on their severity). In the current paper we examine the nature of the endogenous financial crises, and their common origins in over-reliance on financial models, and implementation via financial derivatives.

The finance sector now shows an accelerating trend of virtualization. It is rather pressing for us to enhance coordinated development of the finance market and the real economy. This paper analyzes the mixed conduction mechanism for the finance field and the real economy, and it has been a hot topic in the finance sector to capture the spatial effect and enhance the estimation precision. This paper introduces the regional spatial gravitational effects, which, together with the indicators of the financial market and the real economy, defines the broad economic metric distance and Gravitational effects Spatial Weights Matrix, constructs broad multi-dimensional economic space, and builds multi-variate Spatial-FIAPARCH-DCC models and Spatial SUR contagion models, to explore the impact of the financial crisis on different regions and different real economy sectors. Our research shows that the broad multi-dimensional space has remarkable advantages in the spatial effect between the financial market and the real economy, and there is asymmetric relation between the extent to which the real economy suffers and the degree to which the financial market suffers. The effects of the financial crisis on the real economy show remarkable sectoral industrial agglomeration and hierarchy.

The article deals with modern financial crises and features of their spread in Latin America. The classification of crises and ways of their identification are presented. The interconnectedness of modern financial crises is emphasized, which leads to the emergence of double and triple crises. Such crises have been repeatedly recorded in Argentina, Mexico, Uruguay and other countries. Over a period of more than fifty years, Latin America experienced 165 financial crises, with the largest share of them occurring in currency crises. The article proposes the indicator “crisis burden on the countries of Latin America” – its calculation for the period 1970–2019 showed that the region is characterized by alternating growth and decrease in the burden from banking and currency crises with a relatively stable load from debt crises. The maximum intensity of financial crises was observed in the 1970–1980, and then it decreased, although there were isolated spikes. The interconnectedness of crises is analyzed in the context of the effects of financial contagion – the transmission of shocks through different channels from one country or region to another country or region. Two main approaches explaining the mechanisms of transmission of crises between countries have been allocated. The results of studies indicating the direction and extent of financial contagion in Latin America were discussed. In particular, it is shown that contagion in the crisis periods of 1990–2000 spread both within the region and from the United States through trade and financial channels. The article presents the results of its own empirical study, which also confirmed the existence of contagion in this region. For the calculations, daily data on the stock indices of 8 Latin American countries over a long period of time were used. With the help of econometric tests for shifts in correlations (Forbes-Rigobon test and coskewness test), it was found that the recipients of contagion that spread through the stock market channels from the United States during the global financial crisis of 2007–2009 were countries such as Argentina, Brazil, Colombia and Mexico. During the crisis caused by the spread of COVID‑19, only Mexico was susceptible to contagion. This made it possible to draw a conclusion about the resilience of Latin American economies to the pandemic shock and the effectiveness of restrictive government measures.

This study investigated the evidence of pro-cyclical behaviour of loan loss provision in four East Asian countries, namely Malaysia, Thailand, Singapore, and Hong Kong for the period 1995-2009. Pro-cyclical is defined as building up more loan loss provision during the bad times and reducing them in good times. This study hypothesized that pro-cyclical behaviour of loan loss provision exists in East Asian countries, since they had experienced two types of financial crises – Asian financial crisis in 1997 and global economic crisis in 2008. Utilising a sample of 47 banks, the findings demonstrated that there is evidence of a pro-cyclical pattern in the countries studied, as shown by the negative relationship between loan loss provision and GDP. This study does have a policy implication, where bank regulators should take pro-active action in addressing the issue of pro-cyclicality of loan loss provision because in bad times, increasing loan loss provision would affect the bank’s profit, weaken the bank’s capital, and in turn, diminish its lending activities to creditworthy borrowers. Keywords: Pro-cyclical, Loan loss provision, Malaysian bank

Do sanctions trigger financial crises?

Stability periods between financial crises: The role of macroeconomic fundamentals and crises management policies

The last two decades characterized by financial crisis episodes have seen a proliferation of empirical studies. These early warning system models allowed researchers to distinguish certain key determinants of financial crises, and helped predicting and preventing the occurrence of some crises. However, crises continue to arise as recently illustrated by the onset of the global financial crisis. This clarifies that there are still a lot to learn about financial crises. In this sense, this paper aimed to compare the performance of several currency and banking crisis indicators within the Turkish economy which underwent severe financial crises in the last twenty years. Different currency crisis indicators performed well by detecting the 1994, 2001 and 2008 currency crises, while banking crisis indicators had significant inconsistencies. However, two banking crisis indicators we developed stand for valuable efforts in dating banking crises by constructing aggregate indexes, and contribute significantly to the empirical crisis literature.

Aim. To investigate the essence of the real sector of the Russian economy and identify the features of its impact on achieving economic security under sanctions.Objectives. To determine the essence of the real sector of the economy and assess its contribution to the stability of the national economy under sanctions; to identify the stages of development of the real sector of the Russian economy; to form an approach to regulating the real sector in the context of achieving economic security.Methodology. The research uses methods of comparative, structural, functional, and historical (retrospective) analysis, as well as tools of systemic and institutional approaches.Results. The real sector of the economy includes the production of goods and services, its functioning is associated with the creation of new value. This distinguishes it from the virtual and financial sectors where real, tangible goods are not created and where, in fact, the product formed in the real sector is redistributed. In crisis conditions, the developed real sector serves as the basis for the functioning of the economy and the satisfaction of basic economic needs, its stability determines national economic security.Conclusions. In modern conditions, characterized by sanctions pressure on Russia from unfriendly countries, the real sector of the economy plays an important role in ensuring the stability of the country’s economy as a whole. Its dynamics largely determines protection against traditional and new (sanctions-related) threats and risks to economic security. At the same time, there is a need for government support and regulation of the development of the real sector, which is associated with many different difficulties. To increase the effectiveness of this regulation, a permanent search for a balance between the use of planned and market instruments is required, the development of a mixed system of economic regulation that combines the tools of market and planned approaches. This will make it possible for the state to flexibly and adaptively manage the process of ensuring national economic security.

This chapter identifies three key elements for effectively implementing the Covenants in times of financial crisis: a people-oriented, rights-based perspective, a process to foster coherence, and a new paradigm for bridging the gap between human rights and international financial regulations. It first analyses the anatomy of different types of financial crises from a rights-holder perspective and identifies the key actors and their potential impacts. It shows that, while financial crises share commonalities, their triggers, involved actors, and effects may vary substantially, leading to a complex web of relationships and responsibilities and norm fragmentation. This feeds into an expansion of focus from people to process and coherence with an analysis of the human rights responsibilities of international financial institutions and their members. The chapter concludes by suggesting translational human rights as a new paradigm for bridging the identified conceptual gaps and conflicting interests, and to pave the way for a more active role of the Covenants.

European State Aid Policy in the Financial Sector

Background. The enhancement of effectiveness in regulating the financial and real sectors of the economy through monetary policy is achieved by the coordinated functioning of all components of its regulatory mechanism. Recognizing the systemic principles of monetary processes requires further development and generalization of monetary regulation in the form of a detailed model that should be built on understanding the general nature of this process and accounting for the specifics of its course in Ukraine under martial law conditions. Therefore, the purpose of the study is to develop a systemic model of monetary regulation in Ukraine based on the systematization of theoretical and methodological principles and organizational-management aspects of implementing the state's monetary policy, as well as substantiating criteria for its effectiveness. Methods. To achieve the set goal, the study used methods of induction (to form an inductive generalization regarding the systemic essence of the monetary regulation process), analysis and synthesis (when considering the instruments, goals, and results of the monetary policy of the National Bank of Ukraine), abstraction and generalization (to identify general and specific systemic characteristics of the monetary regulation process in Ukraine), graphical modeling (to form a systemic model of monetary regulation in Ukraine), and mathematical modeling (to substantiate the performance criterion of the systemic model of monetary regulation.) Results. The proposed systemic model of monetary regulation was developed taking into account both the essence of monetary policy aimed at ensuring price stability, and the specifics of its implementation in the state, which is determined primarily by the state and the dynamics of critical indicators of achieving monetary goals. The key elements of the model are defined taking into account the impact of the russian military aggression, the consequences of which were reflected by the critical deviation of the key indicators of monetary policy (primarily, consumer inflation and the discount rate) from the predicted values. The development of the model of monetary regulation in Ukraine confirmed the expediency of considering this process from the point of view of a systemic approach, which assumes the existence of elements traditional for the management system: subjects and objects of regulation, goals, tools, and indicators of their achievement. The crucial role of transmission channels in achieving the state's monetary policy goals is substantiated for developing a systemic model of monetary regulation in Ukraine . Taking into account the effectiveness of the influence of monetary regulation instruments on the financial and real sectors of the national economy, the transmission mechanism of monetary policy is defined as the central element of the systemic model of monetary regulation in Ukraine. Conclusions. The systemic model of monetary regulation proposed in the work was developed considering both the essence of monetary policy, aimed at ensuring price stability, and the specifics of its implementation, determined primarily by the state and dynamics of key indicators showing the achievement of monetary objectives. The key elements of the model were specified taking into account the impact of russian military aggression, which resulted in critical deviation of crucial monetary policy indicators (primarily, consumer inflation and the discount rate) from the predicted values. The development of the model of monetary regulation in Ukraine has confirmed the expediency of considering this process from the standpoint of a systemic approach that assumes the presence of elements traditional for the management system: subjects and objects of regulation, goals, tools and indicators of their achievement. In developing a systemic model of monetary regulation in Ukraine, the study also substantiates the key role of transmission channels in achieving the goals of the state's monetary policy. With regard to the effectiveness of the monetary regulation instruments on the financial and real sectors of the national economy, the transmission mechanism of monetary policy is defined as the central element of the systemic model of monetary regulation in Ukraine.