Liquidity and Contagion: The Crisis of 1763

45 Pages Posted: 7 Oct 2004

See all articles by Isabel Schnabel

Isabel Schnabel

University of Bonn - Institute for Financial Economics and Statistics; Max Planck Society for the Advancement of the Sciences - Max Planck Institute for Research on Collective Goods

Hyun Song Shin

Bank for International Settlements (BIS)

Date Written: May 2004

Abstract

The financial crisis that swept across northern Europe in 1763 bears a strong resemblance to more recent episodes of financial distress. The combination of the specific contractual arrangements at the time, interlocking credit relationships, and the high leverage of market participants triggered distress sales of assets, leading into a severe liquidity crisis. Hence, the crisis is an early instance of contagion on the asset side of the balance sheet. We highlight the salient features of the 1763 crisis and propose a stylized model of the events. Whilst the financial institutions have changed fundamentally in the intervening two hundred or so years, the underlying problems appear to be universal.

Keywords: Liquidity, contagion, financial crises

JEL Classification: G21, E44, N23

Suggested Citation

Schnabel, Isabel and Shin, Hyun Song, Liquidity and Contagion: The Crisis of 1763 (May 2004). Available at SSRN: https://ssrn.com/abstract=600746 or http://dx.doi.org/10.2139/ssrn.600746

Isabel Schnabel (Contact Author)

University of Bonn - Institute for Financial Economics and Statistics ( email )

Adenauerallee 24-42
Bonn, 53113
Germany

HOME PAGE: http://www.finance.uni-bonn.de/schnabel

Max Planck Society for the Advancement of the Sciences - Max Planck Institute for Research on Collective Goods ( email )

Kurt-Schumacher-Str. 10
D-53113 Bonn, 53113
Germany
+49-228-9141665 (Phone)
+49-228-9141621 (Fax)

HOME PAGE: http://www.coll.mpg.de/team/page/isabel_schnabel

Hyun Song Shin

Bank for International Settlements (BIS) ( email )

Centralbahnplatz 2
Basel, Basel-Stadt 4002
Switzerland

HOME PAGE: http://www.bis.org/author/hyun_song_shin.htm

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