Lending of Last Resort, Moral Hazard and Twin Crises: Lessons from the Bulgarian Financial Crisis 1996/1997

68 Pages Posted: 11 Jun 2002

See all articles by Michael Berlemann

Michael Berlemann

Ifo Institute Dresden

Kalin Hristov

Bulgarian National Bank

Nikolay Nenovsky

Bulgarian National Bank

Date Written: May 2002

Abstract

In 1996/1997 Bulgaria was hit by a severe financial crisis, spreading from a banking crisis to a currency crisis. While being widely neglected by the financial crisis literature and the international discussion we argue that the Bulgarian Financial Crisis might serve as an illustrative example of a twin crisis primarily (but not only) due to systematic moral hazard behaviour of the banking sector. Thus, the Bulgarian Financial Crisis might be closer to the story of third generation moral hazard models of currency crises than the Asian Crisis. We also show how Bulgaria managed to overcome the crisis by introducing a second generation currency board allowing the central bank to act as a strictly limited lender of last resort thereby (hopefully) making the country less prone to a financial crisis in the future.

Keywords: Financial Crises, Bulgaria, Lender of Last Resort, Twin Crises, Currency Boards

JEL Classification: E42, E5, F02, P34

Suggested Citation

Berlemann, Michael and Hristov, Kalin and Nenovsky, Nikolay, Lending of Last Resort, Moral Hazard and Twin Crises: Lessons from the Bulgarian Financial Crisis 1996/1997 (May 2002). Available at SSRN: https://ssrn.com/abstract=313192 or http://dx.doi.org/10.2139/ssrn.313192

Michael Berlemann (Contact Author)

Ifo Institute Dresden ( email )

Einsteinstrasse 3
01069 Dresden, 01062
Germany

Kalin Hristov

Bulgarian National Bank ( email )

str "St. Sofia" 5
Sofia, 1040
Bulgaria

Nikolay Nenovsky

Bulgarian National Bank ( email )

str "St. Sofia" 5
Sofia, 1040
Bulgaria
+ 359 2 9145 1239 (Phone)
+ 359 2 980 24 25 (Fax)

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