The international propagation of the financial crisis of 2008 and a comparison with 1931
AbstractWe examine the international propagation of the financial crisis of 2008, and compare it with that of the crisis of 1931. We argue that the collateral squeeze in the United States, which became intense after the failure of Lehman Brothers created doubts about the stability of other financial companies, was an important propagator in 2008. We identify some common features in the propagation of the two crises, the most important being the flight to liquidity and safety. In both crises, deposit outflows were not the only important sources of liquidity pressure on banks: in 1931, the central European acceptances of the London merchant banks were a serious problem, as, in 2008, were the liquidity commitments that commercial banks had provided to shadow banks. And in both crises, the behaviour of creditors towards debtors, and the valuation of assets by creditors, were very important. However, there was a very important difference between the two crises in the range and nature of assets that were regarded as liquid and safe. Central banks in 2008, with no gold standard constraint, could liquefy illiquid assets on a much greater scale.
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Bibliographic InfoPaper provided by Bank for International Settlements in its series BIS Working Papers with number 348.
Length: 35 pages
Date of creation: Jul 2011
Date of revision:
financial crisis; liquidity; international monetary system; Great Depression;
This paper has been announced in the following NEP Reports:
- NEP-ALL-2011-07-13 (All new papers)
- NEP-BAN-2011-07-13 (Banking)
- NEP-CBA-2011-07-13 (Central Banking)
- NEP-HIS-2011-07-13 (Business, Economic & Financial History)
- NEP-IFN-2011-07-13 (International Finance)
- NEP-MON-2011-07-13 (Monetary Economics)
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