Origins and Resolution of Financial Crises: Lessons from the Current and Northern European Crises

Abstract

Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in Forthcoming in Asian Economic Papers AbstractSince July 2007 the world economy has experienced a severe financial crisis originating in the U.S. housing market. The crisis has subsequently spread to the financial sectors in European and Asian economies and led to a severe worldwide recession. The existing literature on financial crises rarely distinguish between factors that create the original strain on the financial sector and factors that explain why these strains lead to systemwide contagion and a possible credit crunch. Most of the literature on financial crises refers to factors that cause an original disruption in the financial system. We argue that a financial crisis with its contagion within the system is caused by failures of legal, regulatory and political institutions. One policy implication of our view is that the need for various forms of rescues of financial firms in times of crises would be reduced if appropriate institutions could be put in place Lacking appropriate institutions to avoid contagion within the financial system and a potential credit crunch, ad hoc financial crisis management is required. We draw on experiences from the financial crises in the Nordic countries at the end of the 1980s and the beginning of the 1990s. In particular, the Swedish model for crisis resolution, which has received attention during the current crisis, is discussed in order to illustrate the problems policy makers face in a financial crisis without appropriate institutions. Current European Union approaches to the crisis are discussed before turning to policy implications from an emerging market perspective in the current crisis.

Financial Liberalization and Banking Crises: A Cross-Country Analysis

“…This categorization is based onOstrup, Oxelheim and Wihlborg (2009). 9 See e.g Mishkin (1991Mishkin ( , 1997,.…”

Top-down restructuring of markets and institutions: the Nordic banking crises

“…It has been argued that Nordbanken was allowed to choose favourable terms from a competitive point of view but unfavourable terms from the point of view of the costs to the economy as a whole. 51 The bank was able to decide which assets should be transferred to Securum and hence not surprising decided to allocate anything where there might be a problem to the asset management company so as to ensure that its own balance sheet would look attractive to investors and depositors. Thus, some of the loans that were transferred to Securum were performing at the time of transfer.…”

The Political Economy of Small European States: And Lessons for Scotland

“…Each country responded in a slightly different way. Denmark's central bank had to guarantee deposits after a run on the second-largest Danish bank; Norway nationalised almost the entire banking sector (the government assumed control of the three largest banks and organised mergers for the smaller banks); and Sweden provided a blanket guarantee to cover all liabilities of its commercial banks (Østrup, Oxelheim and Wihlborg, 2009). Currency flotation in all three countries was required in 1992 and the resultant depreciation meant a reduction in interest rates, lower inflation and, crucially, an economic recovery.…”