Managing financial crises WIDER 2016 Conference, Helsinki The - - PowerPoint PPT Presentation

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Member of the Board, Bank of Finland

Managing financial crises

WIDER 2016 Conference, Helsinki The views expressed are my own and do not necessarily represent the position of the Bank of Finland.

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Seppo Honkapohja

Suomen Pankki – Finlands Bank – Bank of Finland Unrestricted

• I. Introduction
• Financial crises arise when some financial institutions or assets

suddenly lose a large part of their value.

• Different types of crises:

–

Banking crises (runs or related difficulties)

–

Speculative bubbles and crashes (stock markets, real estate)

–

Currency crises; isolated crises and contagion

• Systemic crises: a large number of institutions or assets behave in

a non-sustainable way.

• The frequency of financial crisis doubled in the period since 1973 in

comparison to 1945-71.

–

Excluding the current global crisis, six out of ten biggest bubbles have occurred since 1970s (Table).

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The big ten financial bubbles

(from Kindleberger and Aliber 2005)

1.

The Dutch Tulip Bulb Bubble 1636

2.

The South Sea Bubble 1720

3.

The Mississippi Bubble 1720

4.

The late 1920s stock price bubble 1927–29

5.

The surge in bank loans to Mexico and other developing countries in the 1970s

6.

The bubble in real estate and stocks in Japan 1985–89

7.

The 1985–89 bubble in real estate and stocks in Finland, Norway and Sweden

8.

The bubble in real estate and stocks in Thailand, Malaysia, Indonesia and several other Asian countries 1992–97

9.

The surge in foreign investment in Mexico 1990–93

• 10. The bubble in over-the counter stocks in the United States 1995–2000

Source: C.P. Kindleberger and R. Z. Aliber: Manias, Panics and Crashes, A History of Financial Crises, 2005

23.9.2016 Seppo Honkapohja

Suomen Pankki – Finlands Bank – Bank of Finland Unrestricted

• II. Empirical Overview

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II.1 The Current Crisis Note 1: Comparison to the average of the ”Big Five” crises in advanced economies:

–

Nordics (Finland, Norway, Sweden) in 1990s, Spain in 1980s, Japan in 1990s.

Note 2: T represents the year of start of the financial crisis in the next figures .

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GDP

90 95 100 105 110 115 120 T-4 T-3 T-2 T-1 T T+1 T+2 T+3 T+4

GDP

EA USA Big 5 NORDICS

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Suomen Pankki – Finlands Bank – Bank of Finland Unrestricted

Current account/GDP

• 7
• 6
• 5
• 4
• 3
• 2
• 1

1 2 3 T-4 T-3 T-2 T-1 T T+1 T+2 T+3 T+4

Current Account/GDP

Euroalue USA Big 5

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Suomen Pankki – Finlands Bank – Bank of Finland Unrestricted

Public Debt

50 100 150 200 T-4 T-3 T-2 T-1 T T+1 T+2 T+3 T+4

Public Debt / GDP

EA USA Big 5

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Suomen Pankki – Finlands Bank – Bank of Finland Unrestricted

Stock Market index

60 80 100 120 140 160 180 200 T-4 T-3 T-2 T-1 T T+1 T+2 T+3 T+4

Stock market index

EA USA Big 5

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Suomen Pankki – Finlands Bank – Bank of Finland Unrestricted

House prices

80 90 100 110 120 130 140 T-4 T-3 T-2 T-1 T T+1 T+2 T+3 T+4

House Prices

EA USA Big 5

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II.3 Emerging markets in 2000-2015

Growth of GDP in various regions, 2000-2007

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• 2

2 4 6 8 10 12 2000 2001 2002 2003 2004 2005 2006 2007 % Emerging market and developing economies Commonwealth of Independent States Emerging and developing Asia Emerging and developing Europe Latin America and the Caribbean Middle East and North Africa Sub-Saharan Africa

Source: IMF

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GDP growth 2008-16 in different regions and in selected Asian countries

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• 8
• 6
• 4
• 2

2 4 6 8 10 12 2008 2009 2010 2011 2012 2013 2014 2015 2016 % Emerging market and developing economies Commonwealth of Independent States Emerging and developing Asia Emerging and developing Europe Latin America and the Caribbean Middle East and North Africa Sub-Saharan Africa

• 8
• 6
• 4
• 2

2 4 6 8 10 12 2008 2009 2010 2011 2012 2013 2014 2015 2016 China Hong Kong SAR India Indonesia Korea Lao P.D.R. Malaysia Philippines Vietnam

Source: IMF

Suomen Pankki – Finlands Bank – Bank of Finland Unrestricted

Post-GFC economic recovery has been marked by current account deficits in many regions

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• 10
• 5

5 10 15 2008 2009 2010 2011 2012 2013 2014 2015 2016 %/GDP Emerging market and developing economies Commonwealth of Independent States Emerging and developing Asia Emerging and developing Europe Latin America and the Caribbean Middle East and North Africa Sub-Saharan Africa

Source: IMF

Suomen Pankki – Finlands Bank – Bank of Finland Unrestricted

Developing Economies International Debt Securities

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500 1 000 1 500 2 000 2 500 1990 1995 2000 2005 2010 2015

USD bn Asia & Pacific Latin America & Caribbean Europe Africa & Middle East

Source: BIS International Debt Securities Statistics

Seppo Honkapohja

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Developing Economies Portfolio Investment Liabilities

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1 000 2 000 3 000 4 000 2002 2004 2006 2008 2010 2012 2014

Equities Long term debt securities Short term debt securities USD bn

Source: IMF

Seppo Honkapohja

Suomen Pankki – Finlands Bank – Bank of Finland Unrestricted

• III. Causes of financial crises
• Fragility of financial systems

–

Strategic complementarities

–

Asset-liability mismatches

• Asset price collapse
• Amplifying factors

–

Imperfect knowledge and limitations in human reasoning

–

High leverage

• Regulatory failures

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Suomen Pankki – Finlands Bank – Bank of Finland Unrestricted

• IV. Crisis management

IV.1 Prevention of major crisis

• How to diagnose a coming crisis?
• Political-economy reasons can be a major obstacle in crisis prevention.

IV.2 Crisis management

• Maintaining confidence in the banking system is crucial
• The role of macroeconomic policy:

–

Coordinated macroeconomic response in the global crisis

–

Liquidity provision etc. by central banks

• Restructuring of the banking system
• Capital injections to banks, Improving efficiency of banks
• Government policies to direct restructuring

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Thank you!

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Suomen Pankki – Finlands Bank – Bank of Finland Unrestricted

Unemployment rate

2 4 6 8 10 12 14 T-4 T-3 T-2 T-1 T T+1 T+2 T+3 T+4

Unemployment rate

EA USA Big 5

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