Banking Crisis Research Articles

Anatomy of Financial Crises: Periodization and Causes

Financial crises have a significant impact on the global economy, leading to recessions, increased unemployment rates, and other negative consequences. Deep understanding of the mechanisms of origin and development of financial crises is necessary to enhance the resilience of economic systems. The aim of this article is to study financial crises in terms of their periodization and the systematization of their causes. The study employed methods such as analysis, systematization, and historical methodology to analyze and periodize financial crises during the transitional period from the late 20th century to the early 21st century; comparison, analogies, and systematization to generalize the causes of financial crises; and a logical-consequential method to draw conclusions based on the conducted research. The article explores the specific manifestations of financial crises in the global economy and summarizes their periodization. Systemic determinants of global financial crises are examined. The distinguishing features of banking and currency crises are characterized. The sequence of the development of financial crises in a state based on the "contagion effect" is considered. It is proven that financial crises are not random events; they are caused by various factors, including speculative operations, a lack of regulation and oversight, and excessive lending. Special attention is given to geopolitical factors as one of the most common causes of financial crises in recent decades and to their specific manifestations. It is established that, despite the cyclical nature of financial crises, their scales and consequences always vary, necessitating the development of dynamic tools for crisis management. The research aims to identify patterns and factors that cause financial crises. The results can serve as a basis for developing a system of indicators to predict the likelihood of financial crises, enabling timely preventive measures to prevent or mitigate possible negative consequences. Developing such a system is a complex and comprehensive task that presents prospects for further research. The type of article is theoretical.

The Collapse of Silicon Valley Banks Improves Risk Management for Other Commercial Banks

Silicon Valley Bank, a subsidiary of Silicon Valley Bank Financial Group, provides loans to venture capital as well as startups. Silicon Valley Bank primarily serves technology-based companies. Our paper focuses on the implications of the Silicon Valley bank bankruptcy for other commercial banks from four aspects. First, what are the risks in the business operation model of Silicon Valley banks; second, what caused the bankruptcy of Silicon Valley Bank; Third, the impact of the bankruptcy of Silicon Valley Bank; Fourth, the bankruptcy of Silicon Valley Bank has implications for the development of Chinese commercial banks. The main reason for the bankruptcy of Silicon Valley Bank was the Fed's interest rate hike. As a traditional commercial bank, Silicon Valley Bank's profit model is mainly based on interest differential. Affected by the epidemic, the demand for loans from Silicon Valley banks declined, so Silicon Valley banks chose to buy US Treasury bonds and MSBs. The Fed's interest rate hike coupled with a large amount of money printing in the United States has led to inflation. The sharp depreciation of US Treasuries and MSBs, coupled with the end of the mobile Internet cycle, forced Silicon Valley banks to sell a large number of unmatured bonds. Eventually a bank run occurred, leading to the bankruptcy of Silicon Valley Bank.

Arbitraging the Yield Curve: A Free Lunch?

Banking crises can occur due to the mismatch of assets and liabilities. One of the main assumptions behind maturity mismatching is the incentive to arbitrage the yield curve in the market of loanable funds. Banks borrow at low rates and lend at higher rates to increase their profitability. The equilibrium in the evenly rotating economy (ERE) is a flat yield curve that equals the originary interest rate. This article challenges the notion that banks will always attempt to arbitrage the yield curve in a free market and explores how the price mechanism via interest rates acts as a brake to maturity mismatching. Maturity mismatching is a risky activity that is penalized through a higher cost of funding by different types of lenders. If this is true, it follows that a flat yield curve is not attainable in an uncertain world because financial intermediaries that engage in maturity mismatching will create a further spread between themselves and financial intermediaries that do not engage in this practice in the market of loanable funds. In addition, following Mises, the article discusses how economists should proceed with caution when applying equilibrium constructs, such as the ERE, which can disregard the function and properties, belonging to financial instruments such as debt and equity, of allocating risk in an uncertain world.

Banking crises and corporate trade credit: The role of creditor protection

This study examines the impact of banking crises on corporate trade credit and the moderating role of creditor protection, using a large sample of firms from 45 countries. The findings suggest that banking crises increase firms’ reliance on trade credit due to reduced lines of credit. Moreover, strong creditor protection can weaken the adverse effect of banking crises on firms’ credit access. Our results are robust to a series of sensitivity tests. Finally, this study generates important policy implications. Policymakers should strengthen creditor rights protection to mitigate the credit contraction due to banking crises.

Xử lý trường hợp tổ chức tín dụng bị rút tiền hàng loạt theo Luật Các tổ chức tín dụng 2024 tại Việt Nam

The safety in banking operations and the stability of the system of credit institutions are significant issues from both theoretical and empirical aspects. Therefore, whenever a bank run occurrs, it should be strictly monitored and timely dealt with by effective actions and plans. In Vietnam, the Law on Credit Institutions 2024 has officially provided, for the first time, regulations on handling bank runs. This paper, using content analysis method, discusses on substance of bank runs, analyses typical cases on bank runs in Vietnam and summarizes new points in regulations on bank runs stipulated in the Law on Credit Institutions 2024. The author recommends that the State Bank of Vietnam should issues a detailed guidance on implementations of the Law to effectively enforce the newly issued regulations and enhance the safety and stability of the Vietnamese Banking system.

Tác động của khủng hoảng tài chính đến đa dạng hóa thu nhập của ngân hàng

Using data of 3,695 commercial banks from 142 countries over the period 2002- 2021, our OLS estimates with multiple fixed effects and two-stage least squares approach provide evidence that banking crisis significantly increases the level of bank income diversification, especially large banks. As the business model of small banks focuses on traditional lending activities, income diversification of small banks is not affected by banking crisis. Currency crisis and sovereign debt crisis are not significant drivers of bank income diversification. Tightening regulations on bank activity restrictions and capital stringency helps to cushion the impact of financial crises on bank income diversification. Our findings provide a comprehensive view of the impact of financial crisis on bank income diversification as well as the roles of some bank regulations in times of financial crisis. Some policy implications are also provided for policymakers to implement appropriate policies that reduce bank risktaking during periods of financial crisis.

Healthcare Executive Highlights for First Quarter 2024

It was a great start for 2024, with all major economic indicators appearing to be in good shape with macroeconomic indicators stabilizing. The first quarter included the largest disruption in U.S. healthcare since COVID-19 with a cyberattack as well as fears of another banking crisis. Among the good economic conditions, the 2024 presidential pre-election politics, and the precarious global geopolitics consider maintaining a reserved view of the economy during the second quarter.

Assessing the Probability of Default Using the Altman Model: Silicon Valley Bank

Silicon Valley Bank (SVB) was the 16th largest bank in the US. Established in 1983, its primary customers were the technological sector and life science firms. While SVB was successful over the years, in March 2023, the bank experienced a significant "bank run," which eventually led to its collapse. Using publicly available data from Mergent, this research uses the Altman model to examine three years of financial data from Silicon Valley banks. The results revealed that the bank failed the Altman model test, which is evident that the probability of default was always present but ignored by banking officials and regulators

Do sanctions trigger financial crises?

We investigate the effect of sanctions on the occurrence of financial crises. We use the Classification and Regression Tree (CART) algorithm to check whether binary classification mechanism selects sanctions as a predictive factor for the different types of financial crises. We find that trade sanctions matter for the increased probability of banking crises, while military sanctions are associated with currency crises. We find no evidence of the effect of sanctions on sovereign debt crises. We furthermore indicate which variables and their respective thresholds serve as potential harbingers of financial crises.

Macro-financial imbalances and cyclical systemic risk dynamics: understanding the factors driving the financial cycle in the presence of non-linearities

Abstract This paper develops a multivariate filter based on an unobserved component model to estimate the financial cycle. Our model features: (1) a dynamic relationship between the financial cycle and key variables; (2) time-varying shock volatility for trend and cycle components. We demonstrate that our approach not only exhibits superior early warning properties for banking crises but also outperforms commonly used indicators in terms of data fit for decomposition exercises, as evidenced by the higher marginal likelihood. We document three important properties of the financial cycle. First, the sensitivity of the financial cycle to changes in real estate valuations increased during the post-90s period. Second, the sensitivity of the cycle to changes in financial conditions displays volatility and country specificities. Finally, our reduced form estimates suggest that the banking crisis of 1988 was preceded by positive contributions from the risk appetite shock, while the primary source of vulnerabilities emanated from the housing market in the run-up to the Global Financial Crisis.

Assessing resilience to systemic risks across interbank credit networks using linkage-leverage analysis: Evidence from Japan

The banking crisis started in March 2023 was triggered by disproportion of deposit liability and assets. Applying balance sheets from 1999 to 2022, from the Japanese Bank Association, this study scrutinizes the durability of high-priority banking systems against damaging events in that industry. Eyeing the unique high-level savings in Japanese banking, this study investigates the impact of disproportion of deposit liability and assets on the financial stability of interbank credit networks through a linkage-leverage analysis. This study presents a novel framework that combines actor-network theory, network optimization, and bilateral risk exposure approaches into linkage-leverage analysis. The results in this study show that the bilateral risk exposure during a subset of years is smaller than other years, which indicates that Japanese banks minimize the risk exposure by shifting the network relationship. Finally, this study provides supporting evidence to the new paradigms on developing more stable financial systems.

The impact of financial tightening on firm productivity: Maturity matters

We analyse how the combination of firm-level financial fragility and country-level financial constraints affects productivity growth in France, Italy and Spain. We first show that, although high leverage weighs on firm-level productivity in all three countries, more leveraged firms seem to suffer more from financial constraints only in Italy. In a second step, we show that this apparent specificity of Italian firms is related to the relatively short maturity of their debt. These results highlight the importance of liquidity constraints during periods of financial stress such as the Global Financial Crisis of 2008 or the European sovereign debt and banking crisis of 2011-13.

Determinants of banking crises (Fragility) in the Malawian banking sector

This paper studies the determinants of banking crises or fragility in Malawi. In this study we modelled banking crisis conditions in a developing country banking sector applying a Logistic Regression model using data for Malawi for the period 1980 to 2022. We embedded banking crisis dummy, bank specific and macroeconomic drivers of crisis in the model. Our study finds that under crisis conditions macroeconomic, monetary and fiscal drivers such as the ratio of external debt stock to gross national income ratio, debt service costs to primary export revenue ratio, broad money to GDP ratio, changes in real interest rates, growth in real GDP, total reserves to GDP ratio has a negative and significant impact on banking crisis and fragility in Malawi. These findings are important for policy makers especially in an environment where fiscal dominance is prevalent and drives a significant build up of domestic debt (treasury assets) on the banks’ balance sheets.

Digital money creation and algorithmic stablecoin run

This study examines the downfall of Iron Finance's algorithmic stablecoin in June 2021 and draws parallels with the Terra–Luna (UST) collapse in May 2022. Using transaction-level blockchain data, we dissect the events leading to Iron Finance's failure, unveiling algorithmic stablecoins’ inherent vulnerabilities. We highlight the disproportionate impact on retail investors, a pattern also mirrored in UST, where confidence erosion led to a similar destabilizing ‘bank run.’ Our analysis contributes to the broader understanding of the fragility of DeFi ecosystems and sheds light on the risks of adopting permissionless blockchains and algorithmic stablecoins as payment infrastructures and forms of digital money.

Can Text-Based Statistical Models Reveal Impending Banking Crises?

AbstractThis paper introduces statistical models Wordscores and Wordfish to study and predict banking crises. While Wordscores is akin to supervised learning, Wordfish is analogous to unsupervised learning. Both methods estimate the position of banking distress on a tranquil-to-crisis spectrum. Findings suggest that the two statistical methods signal banking crisis up to two-years in advance, with robust results from AUROC, Granger causality and VAR impulse responses. Both methods outperform random forests in predicting crises using textual data. The Wordscores index highlights increased usage of banking sector nomenclature two years preceding a crisis, and Granger causes a crisis series with one and two lag lengths. Results from the Wordfish technique, a statistical model with Poisson distribution, show the index spikes before and during the Global Financial Crisis, when a large share of the countries in the world encountered banking crises. This paper contributes to literature on text-based models of banking crises by bolstering the preemptive policy responses available to policy makers. Given their early warning signals, both Wordscores and Wordfish can be considered a part of the toolset to monitor the stability and resilience of the banking sector.

Bank ownership, credit supply volatility, and macroeconomic volatility

We examine the real effects of credit supply volatility in emerging economies. In countries with highly effective governments, government-owned banks play a significant role in reducing the effect of credit supply volatility on macroeconomic volatility. Conversely, foreign banks do not significantly change this effect. Furthermore, the presence of government-owned banks as development banks plays a positive role in stabilizing the economy during a sovereign or currency crisis. In countries where foreign banks dominate the banking sector, these banks amplify the adverse effect of a volatile credit supply on the volatilities in output, consumption, and investment growth rates, especially during a banking crisis.

Demand Deposit Contracts and Probability of Bank Runs in Nigeria

The problem of bank runs is a global phenomenon and often damaging to the banking systems both in developed and developing countries. Monetary authorities always find it very difficult to resolve such a crisis; hence, it became imperative to examine this scenario in the case of Nigeria. Therefore, we examined the effect of demand deposit contracts on the probability of bank runs in Nigeria. This is considered a major contribution to the literature on finance from the perspective of an emerging market economy (EME). In this study, a multilevel Tobit regression approach was employed. This study identified statistically significant and positive effects of liquid assets (total assets) and total loans (total deposits) on bank runs in Nigeria. Based on the results, the study concluded that bank-specific factors have an effect on bank runs, and from these variables, liquid assets/total assets and total loans/total deposits have significant effects on bank runs. As a sequel to the findings and conclusion of this study, it was recommended that to avoid such a banking crisis, there is a need for deposit money banks in Nigeria to maintain adequate liquid assets and ameliorate the high level of deterioration in the quality of risk assets as well as the cost of funds.

Transformation of Additional Bank Indonesia'scapital Adequacy Ratio (Car) into State Collecting Rights Blbi

The escalation of the monetary crisis in 1997/1998 had an impact on the banking industry in Indonesia, most of the banking industry ran out of money (bokek) so that the existence of banks became insolvent banks. Bank Indonesia, which functions as the last monetary gateway, issued monetary policy with the Liquidity Assistance Fund (BLBI) scheme, which was a bailout fund for Bank Indonesia for insolvent banks affected by the 1997/1998 monetary crisis. Bank Indonesia 's liquidity assistance scheme to obligors ( recipients ) has resulted in Bank Indonesia 's capital adequacy ratio ( CAR ) . Bank Indonesia's Capital Adequat Ratio (CAR) is in free fall. Bank Indonesia is undercapitalized. The government covered Bank Indonesia's lack of capital, not with cash and in full, but with government bonds (SUN), the nominal value of this SUN is equivalent to the amount of BI Liquidity Assistance (BLBI) provided by Bank Indonesia to obligors. SUN is subsequently used by Bank Indonesia as a means of Bank Indonesia's Capital Maintenance Notes (CMN). The Capital Maintenance Notes are then compensated with the transfer of the claim rights (cessie) to the obligor (the BLBI receiving bank), by Bank Indonesia, to the Government. BLBI, which was originally a monetary policy, turned into fiscal policy, changed the legal status of BLBI collection rights, became a government asset in the form of state receivables, but historically the settlement costs which also used SUN have come down short. Fiscal policy, regarding the settlement of collection rights (cessie) turned out to be more expensive than the total collection rights (cessie), on the other hand, with the maturity of government bonds (SUN) used as a CMN facility, resulting in a sustainable government burden, at least this burden continues for up to five presidents and will continue in the administrations of subsequent presidents. This paper study uses a normative approach which is expected to be able to answer the epistemological problems of the theme of this article, which is entitled Transformation of the Addition of the Capital Adequacy Ratio (Car) of Bank Indonesia into BLBI State Collection Rights.

Assessing Machine Learning Techniques for Predicting Banking Crises in India

The historical prevalence of banking crises and their profound impact on global economies underscores the imperative for policy makers to refine their crisis forecasting frameworks. Against this backdrop, the present study endeavors to predict potential banking crises in India by leveraging a spectrum of artificial intelligence and machine learning techniques (AI-ML). These techniques encompass logistic regression, random forest, naïve Bayes, gradient boosting, support vector machine, neural networks, K-nearest neighbors, and decision trees. Initially, a banking fragility index was constructed utilizing monthly banking data spanning 2002 to 2023, demarcating the periods of crisis and stability. Subsequently, an extensive array of early warning indicators (EWIs) encompassing asset prices, macroeconomic factors, external influences, and credit-related variables were employed to forecast crisis periods. Our findings reveal that AI-ML models exhibit reasonable accuracy in predicting banking crises. Moreover, advanced model performance metrics highlight neural networks and random forest models as particularly effective in crisis prediction, surpassing other methodologies. Notably, among the EWIs, variables related to credit, interest rates, and liquidity emerge as possessing relatively higher information value in discerning fragilities within the Indian banking system. Importantly, the methodological framework presented herein can be extrapolated for banking crisis prediction in other economies.

The Effect of Crises on Fiscal and Political Re-Centralization

Economic stability plays a crucial role in any fiscal and political decentralization process. In the face of financial and economic shocks, when revenues and expenditures are reduced, countries may decide to gather resources at the central level creating a re-centralization scenario or may take away devolved powers and centralize political institutions. Using data from 75 countries, we examine the effects of the economic crisis on fiscal and political decentralization. We find that several types of crises lead to fiscal re-centralization. However, in the case of domestic borrowing crises, the effect is further revenue decentralization, probably reflecting the central government's willingness to empower sub-national governments to avoid similar crises. In addition, we explore the impact of the economic crisis on political decentralization and find that they are concordant with the fiscal decentralization effects, suggesting an alignment of the impact along political and fiscal dimensions of subnational autonomy. We also explore whether the economic crises trigger more permanent rather than just transitory changes in the level of decentralization, and we generally find more long-lasting effects in the case of fiscal decentralization measured from the expenditure side. This pattern is apparent in the cases of inflation and banking crises and is less precise but still present in the cases of currency and external debt crises. The main results are robust to different specifications, estimation methods, and the measurement of decentralization.