Managing financial crises

Transcription

1 Seppo Honkapohja 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 Unrestricted 1

2 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 Excluding the current global crisis, six out of ten biggest bubbles have occurred since 1970s (Table). Unrestricted 2

3 The big ten financial bubbles (from Kindleberger and Aliber 2005) 1. The Dutch Tulip Bulb Bubble The South Sea Bubble The Mississippi Bubble The late 1920s stock price bubble The surge in bank loans to Mexico and other developing countries in the 1970s 6. The bubble in real estate and stocks in Japan The 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 The surge in foreign investment in Mexico The bubble in over-the counter stocks in the United States Source: C.P. Kindleberger and R. Z. Aliber: Manias, Panics and Crashes, A History of Financial Crises, Seppo Honkapohja Suomen Pankki Finlands Bank Bank of Finland Unrestricted 3

4 II. Empirical Overview 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 Seppo Honkapohja Suomen Pankki Finlands Bank Bank of Finland Unrestricted 4

5 Gross Domestic Product index, T-4 = 100 GDP 90 T-4 T-3 T-2 T-1 T T+1 T+2 T+3 T+4 Euroarea USA Big 5 NORDICS Source: Ameco database Unrestricted 5

6 Current account to GDP ratio Current Account/GDP T-4 T-3 T-2 T-1 T T+1 T+2 T+3 T+4 Euroarea USA Big 5 Source: Ameco database Unrestricted 6

7 Public Debt Public Debt / GDP 200 index, t-4 = T-4 T-3 T-2 T-1 T T+1 T+2 T+3 T+4 Euroarea USA Big 5 Source: Ameco database. Big five excluding Spain Unrestricted 7

8 Stock Market index index, T-4 = 100 Stock market index 60 T-4 T-3 T-2 T-1 T T+1 T+2 T+3 T+4 Euro area USA Big 5 Source: Bloomberg Unrestricted 8

9 House prices House Prices T-4 T-3 T-2 T-1 T T+1 T+2 T+3 T+4 Euro area USA Big 5 Source: OECD Economic Outlook Unrestricted 9

10 II.2 Emerging markets in Growth of GDP in various regions, % 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 Unrestricted 10

11 GDP growth in different regions and in selected Asian countries % 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 Unrestricted China Hong Kong SAR India Indonesia Korea Lao P.D.R. Malaysia Philippines Vietnam

12 Post-GFC economic recovery has been marked by current account deficits in many regions %/GDP Emerging market and developing economies Emerging and developing Asia Latin America and the Caribbean Sub-Saharan Africa Commonwealth of Independent States Emerging and developing Europe Middle East and North Africa Source: IMF Unrestricted 12

13 Developing Economies International Debt Securities USD bn Asia & Pacific Europe Latin America & Caribbean Africa & Middle East Source: BIS International Debt Securities Statistics Seppo Honkapohja Suomen Pankki Finlands Bank Bank of Finland Unrestricted 13

14 Developing Economies Portfolio Investment Liabilities USD bn Equities Long term debt securities Short term debt securities Source: IMF Seppo Honkapohja Suomen Pankki Finlands Bank Bank of Finland Unrestricted 14

15 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 Unrestricted 15

16 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 Unrestricted 16

17 Thank you! Unrestricted 17