Banking Crises: A Review

Posted: 10 Jan 2012

See all articles by Luc Laeven

Luc Laeven

European Central Bank (ECB); Centre for Economic Policy Research (CEPR)

Date Written: December 2011

Abstract

This review surveys the theoretical and empirical literature on the causes and consequences of banking crises, and summarizes the lessons learned from policy interventions to resolve banking crises. Despite their different origins, banking crises display similar patterns. Their causes lie in unsustainable macroeconomic policies, market failures, regulatory distortions, and government interference in the allocation of capital; they are frequently characterized by boom-bust cycles in credit and asset prices; and they are generally resolved through large-scale government intervention. When not handled effectively and swiftly, banking crises tend to impose enormous costs to society by curtailing the flow of credit to the real economy. The article concludes with a review of proposals to enhance financial stability in an increasingly integrated financial system, which include making banking regulation more macroprudential — focusing on the cycle and systemic risk rather than the risk of individual banks — and improving market discipline by limiting explicit and implicit government insurance of bank liabilities.

Suggested Citation

Laeven, Luc A., Banking Crises: A Review (December 2011). Annual Review of Financial Economics, Vol. 3, pp. 17-40, 2011, Available at SSRN: https://ssrn.com/abstract=1981826 or http://dx.doi.org/10.1146/annurev-financial-102710-144816

Luc A. Laeven (Contact Author)

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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