Spread Of Financial Crisis Research Articles

Financial crisis spread, economic growth and unemployment: a mathematical model

Abstract The unemployment is the main channel through which the economic and financial crises influence the social development. In this paper, we propose a mathematical model to study the interactions between financial crisis spread, economic growth and unemployment. We also solve an optimal control problem focusing on the minimization, at the lowest cost, of the adverse effects of the financial crisis. The analysis of the model leads us to two equilibria: (1) a stress free equilibrium, where the economy and the employment are optimal, and (2) a stressed equilibrium. We obtain a theoretical confirmation of Okun’s law and a formula to compute the minimum reservation wage in terms of model parameters. Numerical simulations are performed to illustrate the theoretical results obtained.

Global Financial Crisis and Financial Market Regulation: Updated Alarms and Market Architecture

This paper is structured around two vital problematic areas, such as financial market performance and integration of financial market regulation. It studies the roots, spread and impact zones of the global financial crisis, analysis the financial market behaviour and several regulative policies, and offers scientifically rooted practically proven improvement proposals for ensuring a sound financial market regulation.

Simulation of Contagion in the Stock Markets Using Cross-Shareholding Networks: A Case from an Emerging Market

In recent years, simulation of contagion in financial markets is one of the main concerns of the economic and finance researchers and policy makers in order to analyze the effects of different shocks on the contagion. In this paper, we introduce a simulation model to analyze the contagion in financial markets based on the cross-shareholding network of firms. In order to validate the proposed model, we investigate the results of a real dataset from an emerging market. According to different kinds of idiosyncratic and aggregate shocks to the system, we analyze the probability and the extent of contagion. Moreover, to study the effect of market structure, the results of different null models are compared with the real network. The results show that the proposed simulation model and the cross-shareholding network are effectively appropriate in the analysis of contagion and systemic risk in the financial systems. The results of null models indicate that the structural characteristics of the financial networks have significant role in the spread of shocks and financial crisis. The results also reveal that for the networks with homogeneity for degree and weights underestimates the number of infected firms and overestimates the loss percents.

Study on the Phenomenon of Bank Liquidity Tail

The entry of foreign banks, the spread of financial crisis, the marketization of interest rates and the impact of the point of time assessment lead to the phenomenon of bank liquidity tail, which has a negative impact on commercial banks, the financial system and the national economy. This paper is based on the current situation of the phenomenon of bank liquidity tail, analyzes the reasons of bank liquidity tail from two aspects of management and supervision system of bank liquidity, and proceed from the inner bank, the central bank's monetary policy, the external environment and so on, to find credit mismatches, credit term structure mismatch, the end of the month to pay the deposit reserve, the central bank focused on open market operations, the external macro environment are the main factors of bank liquidity tail. Therefore, this paper puts forward some countermeasures to solve the problem of bank liquidity from the perspective of liquidity supervision system, the bank's own management mode, the central bank credit rationing and the external environment change.

Capital and credit market integration and real economic contagion during the global financial crisis

This study investigates the role of financial integration in the spread of global financial crisis. In particular, this study shows how the effect of the crisis on real business cycle co-movement varied for capital and credit market integration, using a sample of 58 countries in 2001–2013. During the global financial crisis, the United States – the epicenter of the crisis – experienced a severe downturn in the real economy, and other countries followed suit. We find that during the global financial crisis, the business cycle co-movements between the United States and the rest of the world were stronger when the level of capital market integration between them was higher. However, the co-movements were weaker when the level of credit market integration was higher. These findings are robust even when including investment channels, local fundamental factors, endogenous policy responses across countries, and alternative measures for financial integration and business cycle co-movements.

The Resilience of Future Monetary Union in Emerging Countries to International Financial Shocks: A New Set of Banking and Financial Regional Criteria

This survey presents an analysis that incorporates the lessons of the positive literature on the third generation of crises into the traditional optimum currency area theory to propose a new set of criteria that ensure better resilience of a monetary union to financial contagion. The study stresses the fact that new banking and financial criteria must be considered to protect integrated economies against common international financial shocks. The 2007 US liquidity crisis that spread into the Eurozone and generated a considerable economic slowdown validates these propositions. It underlines the insufficiency of the Maastricht criteria, which do not incorporate these measures and do not make it possible to anticipate or resorb the spread of international financial crisis. These considerations could be integrated into the future monetary union projects in emerging countries organised today in common markets and allow for the circumvention of the disastrous economic and social effects generated by the spread of financial crisis in the real sector of these economies.

Regional Currency Settlements in East Asia: Risks and Tasks for Korea

East Asian Countries has developed the financial cooperation via CMIM, ABMI after the Asian currency crisis. Lee and Park (2014) and Rhee and Sumulong (2014) advocate the use of local currencies in trade settlements. The regional currency settlements will reduce the USD dependancy in the regional economy, so it will promote financial stability in the region. But they might induce risks for Korean economy. Korea’s trade accounts are deficit with Middle East and Japan and surplus with other regions. Most USD settled trade surplus comes from trades with China and ASEAN. Therefore, if the regional currency settlement increases in East Asia, then USD settled surplus would be shrunk considerably since the trade deficit with Middle East still would be settled in USD. The increased interconnection of regional economy may speed up the spread of financial crisis if it happens in the region. And it is possible that currencies in East Asia are valued as a bloc regardless of Korean macroeconomy conditions. Traders may choose only Yuan for their settlement when the regional currency settlement is promoted since China promoted Yuan internationalization. The convertibility of local currencies should be guaranteed to avoid any problem caused by USD surplus reduction problem. The crisis prevention effort should be strengthened and local currencies’ FX hedging tools should be provided to traders. We should make KRW more acceptable in the region in order to minimize potential risks associated with increased local currency settlements.

Russian cyclical indicators and their usefulness in real time. (Report)

This report investigates the predictability of cyclical turning points in Russia. For years, anyone interested in Russia had access to a full set of common tools for business cycle analysis, such as several composite leading indicators, a purchasing managers’ index, enterprise and consumer sentiment indexes, and so on. However, the 2008-09 world financial crisis spread throughout Russia quite unexpectedly for most politicians, businessmen and experts alike. Is it possible that none of existing indexes were able to say anything about the approaching decline? Using a simple rule of thumb proposed in this report one may easily see that that in reality this was not the case. So then why did a more or less definite forecast provided by some indexes have no consequences for common economic sentiments in Russia? This report gives some answers to this question. Keywords: recession; growth cycles; cyclical indicators; leading indicators; turning points; Russia JEL classification: E32

The Eurozone Debt Crisis and the European Banking Union: A Cautionary Tale of Failure and Reform

The 2008 global financial crisis spread to most of the developed economies, including those of the European Union. Unfortunately, despite decades of effort to build a Single Financial Market, almost all EU jurisdictions lacked proper crisis resolution mechanisms, especially with respect to the cross-border dimensions of a global crisis. This led to a threat of widespread bank failures in EU countries and near collapse of their financial systems. Today, in the context of the Eurozone financial crisis, the EU is at a critical crossroads. It has to decide whether the road to recovery runs through closer integration of financial policies and of bank supervision and resolution, or whether to take the path of fragmentation with a gradual return to controlled forms of protectionism in the pursuit of narrow national interest, although the latter is bound to endanger the single market. Therefore, the policy dilemmas facing the EU and contemporary institution building within the Eurozone provide a key window into the future of both global and regional financial integration.

Russian Cyclical Indicators and Their Usefulness in Real Timee: An Experience of the 2008-2009 Recession

This paper investigates the predictability of cyclical turning points in Russia. For years, anyone interested in Russia had access to a full set of common tools for business cycle analysis: several versions of Composite Leading Index, a Purchasing Managers' Index, Enterprise and Consumer Sentiment Indexes, etc. However, the 2008-2009 world financial crisis spread throughout Russia quite unexpectedly for most politicians, businessmen and experts alike. Is it possible that none of existing indexes were able to say anything about the approaching decline? In reality this is not the case. So then why did a more or less definite forecast provided by some indexes have no consequences for common economic sentiments in Russia? This paper gives some answers for this question.

Special topic: Financial crisis

In the last decades an increasing role has been played by quantitative analysis to provide support in the decision making process of business processes, bank performance and government strategies aimed to redesign their budget composition. Financial players have been excessively exposed to risk, which has been one of the main causes of the recent financial crisis. Some of these risks were used in order to take highly speculative strategies which led to bankruptcy of some very large banks and threatened the stability of the international financial system. The immediate response to this situation was the introduction of specific regulations aimed at forcing market participants to abide by better rules and transparency. Together with the introduction of specific measures, an extensive use of over the counter derivatives, such as credit default swaps, has occurred. The use of these financial instruments in combination with securitization in a quite deregulated environment has threatened the stability of the financial system. National governments opted for enormous financial support for certain parts of the banking sector. Eventually the financial crisis spread to the real sector and led to a global recession in most European countries. Moreover, the increasing public debt due to the Sub-Prime Crisis further antagonized the subsequent European sovereign debt crisis of 2009–2012. Given these recent developments and their tremendous consequences for the global economy, there is an urgent need for an in-depth analysis of the various causes of the current global financial crisis to enable us to draw useful lessons for the future. This Special Topic ‘‘Financial Crisis’’ brings together three contributions

Why Ireland's Luck Ran Out and What this Means for the Eurozone

Given its impressive economic performance over the past two decades, Ireland earned the title, the ‘Celtic Tiger’. However, as the contagion from the subprime-induced global financial crisis spread, Ireland's boom went bust. In short order, Ireland (like Greece before it), had to seek financial assistance from the EU and the IMF to stave off sovereign default and national humiliation. How did Dublin and the eurozone respond to the crisis and what lessons can be learned from Ireland's experience? While Ireland grapples with its huge public debt, the EU needs to instill confidence in the markets before the current rolling debt crisis becomes a systemic threat to the eurozone.

EU and U.S. Solutions to Systemic Risk and Their Potential Influence on a World Trade Organization Approach

As the 2008 financial crisis spread globally, it became widely apparent that an essential ingredient to preventing future systemic crises was reform of the regulation of financial markets. Two ambitious initiatives for regulatory reform are the European Union's European System of Financial Supervision and the United States' Dodd-Frank Wall Street Reform and Consumer Protection Act. These two approaches to addressing systemic risk differ greatly in both their specificity and the level of authority they entrust to centralized regulators. They provide distinct models on which a potential global systemic risk regulator could be based – a regulator that could be formed via the World Trade Organization, which has successfully liberalized global trade and has a role in global finance. This paper explores the EU and U.S. systemic risk regulatory models and explains why the EU approach is better suited for adaptation to the WTO.

An Alternative View of Finance, Saving, Deficits, and Liquidity

This paper contrasts the orthodox approach with an alternative view on finance, saving, deficits, and liquidity. The conventional view on the cause of the current global financial crisis points first to excessive U.S. trade deficits that are supposed to have “soaked up” global savings. Worse, this policy was ultimately unsustainable because it was inevitable that lenders would stop the flow of dollars. Problems were compounded by the Federal Reserve’s pursuit of a low-interest-rate policy, which involved pumping liquidity into the markets and thereby fueling a real estate boom. Finally, with the world awash in dollars, a run on the dollar caused it to collapse. The Fed (and then the Treasury) had to come to the rescue of U.S. banks, firms, and households. When asset prices plummeted, the financial crisis spread to much of the rest of the world. According to the conventional view, China, as the residual supplier of dollars, now holds the fate of the United States, and possibly the entire world, in its hands. Thus, it’s necessary for the United States to begin living within its means, by balancing its current account and (eventually) eliminating its budget deficit. I challenge every aspect of this interpretation. Our nation operates with a sovereign currency, one that is issued by a sovereign government that operates with a flexible exchange rate. As such, the government does not really borrow, nor can foreigners be the source of dollars. Rather, it is the U.S. current account deficit that supplies the net dollar saving to the rest of the world, and the federal government budget deficit that supplies the net dollar saving to the nongovernment sector. Further, saving is never a source of finance; rather, private lending creates bank deposits to finance spending that generates income. Some of this income can be saved, so the second part of the saving decision concerns the form in which savings might be held — as liquid or illiquid assets. U.S. current account deficits and federal budget deficits are sustainable, so the United States does not need to adopt austerity, nor does it need to look to the rest of the world for salvation. Rather, it needs to look to domestic fiscal stimulus strategies to resolve the crisis, and to a larger future role for government in helping to stabilize the economy.

Beyond the financial crisis: a way forward with development paradigm

As the impact of the financial crisis spreads worldwide, it has become a top priority of various countries, international institutions, entrepreneurs and scholars to find innovative and creative ways to face this challenge. As Hazel Henderson (2002) has pointed out, “the world has not fallen into a financial crisis, but fundamentally fell into a crisis of development paradigm.” We need to reflect seriously on this paradigm and rethink of the social and economic models and cultural values for meeting the challenges of this crisis. The paper introduces key issues of development within a global context, and explores the shift of the value system from hard technology centered to soft technology-based future direction of human development.

Complexity and Financial Panics

During extreme financial crises, all of a sudden, the financial world that was once rife with profit opportunities for financial institutions (banks, for short) becomes exceedingly complex. Confusion and uncertainty follow, ravaging financial markets and triggering massive flight-to-quality episodes. In this paper we propose a model of this phenomenon. In our model, banks normally collect information about their trading partners which assures them of the soundness of these relationships. However, when acute financial distress emerges in parts of the financial network, it is not enough to be informed about these partners, as it also becomes important to learn about the health of their trading partners. As conditions continue to deteriorate, banks must learn about the health of the trading partners of the trading partners of the trading partners, and so on. At some point, the cost of information gathering becomes too unmanageable for banks, uncertainty spikes, and they have no option but to withdraw from loan commitments and illiquid positions. A flight-to-quality ensues, and the financial crisis spreads.

Globalization, Ideology, and Narratives of the East Asian Financial Crisis

In his paper, Globalization, Ideology, and Narratives of the East Asian Financial Crisis, Ezra Yoo-Hyeok Lee analyzes the narratives of the East Asian financial in 1997-98, arguing that it took place in the course of restructuring the world economy so that the first world would keep its hegemonic power. The East Asian financial crisis spread rapidly to the rest of the globe and in this urgent situation, the IMF: International Monetary Fund played its now typical role as a savior of the world. Before the financial crisis, the East Asian economy was considered to be an exemplary model from which Western countries could learn. But after the financial crisis, in the course of saving East Asian countries, the IMF produced a completely different discourse that was readily accepted in the West. The IMF claimed that the lack of the transparency and cronyism of the East Asian economy were the main causes of the financial crisis in the region. The IMF then began to restructure the East Asian economy that had already been structured over the last three decades according to the Western standard without considering carefully enough the impact on the lived experience of East Asian people. Lee examines how the IMF constructs a new Orientalism in order to rationalize its harsh cure for the East Asian financial crisis and attempts to unmask the doubleness of the Western economy, particularly the American economy, by analyzing how the discourse of transparency is applied differently to its own economic problems, as, for instance, in the case of Enron. Ezra Yoo-Hyeok Lee, Globalization, Ideology, and Narratives of the East Asian Financial Crisis page 2 of 10 CLCWeb: Comparative Literature and Culture 7.3 (2005):

The effect of the Asian financial crisis on the performance of Korean nationwide banks

The Asian financial crisis spread its effect quickly across a number of countries. Korea faced serious problems in her financial and corporate sectors. This study considers the performance of Korean nationwide banks before and immediately after the Asian financial crisis. The performance of Korean nationwide banks took a big hit in 1998. Most banks recovered somewhat in 1999 with the notable exception of the further deterioration of Seoul. Several factors possess strong correlations with bank performance. Among other standard findings, equity to assets correlates positively with bank performance, even when the government recapitalized a number of institutions that performed poorly. The Asian crisis did not affect the normal rules of good bank management. The government, however, directly intervened in the banking sector on a large scale to limit the scope of the crisis in the Korean economy.

Regional Financial Crises and Equity Market Reactions: The Case of East Asia

In this paper we investigate the relationship between regional financial turmoil and equity markets of three emerging Asian economies: Indonesia, Malaysia, and Thailand. The study focuses on the contagion of the regional banking and financial difficulties to security markets in these three countries. The VAR and bivariate GARCH model results show that, once the regional financial crisis spreads, equity markets decline and exacerbate the crisis. The speed with which equity markets respond to the regional liquidity and financial turmoil is quite similar despite disparate market capitalization and GDP of the regional economies. The volatility becomes persistent and the equity market and financial sector volatility appear to fuel further volatility in one another. However, we show that Malaysia, the most developed of the sample markets, weathered the crisis quicker and more successfully than the other two. These results have important ramifications for financial market participants, local regulators, and international governing bodies such as the IMF.

International Financial Contagion: Why are Eastern Europe's banks not failing when everybody else's are?

While the Asian financial crisis spread to Russia and Brazil, the transition economies in Central and Eastern Europe (CEECs) are largely unaffected by international financial contagion. This is the more surprising considering that most economies have experienced severe banking sector problems in the past, that large bad loan ratios are still prevalent, that banking regulation and supervision are only slowly improving, and that stabilizing policies have slowly been eliminated. What insulated the CEECs from the recent wave of financial instability? To consider the counterfactual, we first provide a framework that links banking crises to financial deregulation. We then focus on a number of macro‐ and microeconomic factors, using data compiled from the IMF's International Financial Statistics, from the World Bank's World Debt Tables, and from the BIS's Consolidated International Banking Statistics. We first compare past experiences in CEECs with those in other emerging economies as a cross‐sectional reference point. We then consider whether the situation in CEECs has changed since the last banking sector problems, in order to establish a reference point across time. Our results indicate that the factors leading up to past banking crises are generally different in CEECs from those in other emerging economies. However, in recent years, the characteristics of CEECs have become more similar to those of other emerging economies.