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

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  • Michael Berlemann

    ()

  • Kalin Hristov

    ()

  • Nikolay Nenovsky

    ()

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.

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Bibliographic Info

Paper provided by William Davidson Institute at the University of Michigan in its series William Davidson Institute Working Papers Series with number 464.

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Length: 68 pages
Date of creation: 21 May 2002
Date of revision:
Handle: RePEc:wdi:papers:2002-464

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

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References

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Cited by:
  1. Nikolay Nenovsky & Petar Chobanov & Gergana Mihaylova & Darina Koleva, 2008. "Efficiency of the Bulgarian Banking System: Traditional Approach and Data Envelopment Analysis," Working paper series 12008en, Agency for Economic Analysis and Forecasting.
  2. Peter Ignatiev, 2003. "The banking crisis in Bulgaria in 1996-1997," Economic Thought journal, Bulgarian Academy of Sciences - Economic Research Institute, issue 1, pages 66-88.
  3. Peter Ignatiev, 2004. "Theoretical Models of Financial Crises," Economic Thought journal, Bulgarian Academy of Sciences - Economic Research Institute, issue 2, pages 110-130.
  4. Shannon Mudd & Neven Valev, 2009. "Once Bitten, Twice Shy: Experiences Of A Banking Crisis And Expectations Of Future Crises," William Davidson Institute Working Papers Series wp969, William Davidson Institute at the University of Michigan.

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