IDEAS home Printed from https://ideas.repec.org/p/xrs/sfbmaa/02-46.html
   My bibliography  Save this paper

Foreshadowing LTCM: The Crisis of 1763

Author

Listed:
  • Schnabel, Isabel

    (Sonderforschungsbereich 504)

  • Shin, Hyun Song

    (Department of Economics and Finance, London School of Economics)

Abstract

The financial crisis that swept across northern Europe in 1763 bears an uncanny resemblance to more recent episodes of financial market turbulence - in particular, to the events of autumn 1998 when mature financial markets were caught in a severe liquidity crisis, culminating in the near collapse of Long-Term Capital Management. We highlight the salient features of the 1763 crisis, propose a stylized model of the events, and draw parallels between the events of 1763 and 1998. Whilst the financial landscape has changed fundamentally in the intervening two hundred or so years, the policy lessons have a resonance that transcend this gap in time. The potentially devastating effects of liquidity risk, the limits to hedging and financial engineering, and the importance of timely crisis management by the authorities are all lessons that have currency today as they did in 1763.

Suggested Citation

  • Schnabel, Isabel & Shin, Hyun Song, 2001. "Foreshadowing LTCM: The Crisis of 1763," Sonderforschungsbereich 504 Publications 02-46, Sonderforschungsbereich 504, Universität Mannheim;Sonderforschungsbereich 504, University of Mannheim.
    • Handle: RePEc:xrs:sfbmaa:02-46
    Note: We are indebted to Steve Cecchetti, Charles Goodhart, Martin Hellwig, Nobu Kiyotaki, Jamie McAndrews, Will Roberds and Peter Sinclair for their comments on earlier drafts. We thank Rainer Metz, Hans-Jürgen Gerhard and Alexander Engel for their support in the collection of the commodity price data. We have benefited from the comments of participants at the Bank of England conference on capital flows and seminar participants at the University of Mannheim and the Bank for International Settlements.
    as

    Download full text from publisher

    File URL: http://www.sfb504.uni-mannheim.de/publications/dp02-46.pdf
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Bank for International Settlements, 1999. "A Review of Financial Market Events in Autumn 1998," CGFS Papers, Bank for International Settlements, number 12, december.
    2. Douglas W. Diamond & Philip H. Dybvig, 2000. "Bank runs, deposit insurance, and liquidity," Quarterly Review, Federal Reserve Bank of Minneapolis, vol. 24(Win), pages 14-23.
    3. Antonio E. Bernardo & Ivo Welch, 2002. "Financial Market Runs," NBER Working Papers 9251, National Bureau of Economic Research, Inc.
    4. Philippe Jorion, 2000. "Risk management lessons from Long‐Term Capital Management," European Financial Management, European Financial Management Association, vol. 6(3), pages 277-300, September.
    5. Myron S. Scholes, 2000. "Crisis and Risk Management," American Economic Review, American Economic Association, vol. 90(2), pages 17-21, May.
    6. Dong Lee & Bong-Chan Kho & Rene M. Stulz, 2000. "U.S. Banks, Crises, and Bailouts: From Mexico to LTCM," American Economic Review, American Economic Association, vol. 90(2), pages 28-31, May.
    7. Kahn, Charles M. & Roberds, William, 2007. "Transferability, finality, and debt settlement," Journal of Monetary Economics, Elsevier, vol. 54(4), pages 955-978, May.
    8. Martin Hellwig, 1995. "Systemic Aspects of Risk Management in Banking and Finance," Swiss Journal of Economics and Statistics (SJES), Swiss Society of Economics and Statistics (SSES), vol. 131(IV), pages 723-737, December.
    9. C. H. Furfine, 2001. "The costs and benefits of moral suasion: Evidence from the rescue of long-term capital management," BIS Working Papers 103, Bank for International Settlements.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Stephen Morris & Hyun Song Shin, 2004. "Liquidity Black Holes," Review of Finance, European Finance Association, vol. 8(1), pages 1-18.
    2. Michael D. Bordo, 2011. "A Historical Perspective on the Crisis of 2007–08," Central Banking, Analysis, and Economic Policies Book Series, in: Rodrigo Alfaro (ed.),Financial Stability, Monetary Policy, and Central Banking, edition 1, volume 15, chapter 2, pages 011-027, Central Bank of Chile.
    3. Ms. Brenda Gonzalez-Hermosillo & Mr. Vance Martin & Ms. Renee Fry & Mr. Mardi Dungey, 2003. "Unanticipated Shocks and Systemic Influences: The Impact of Contagion in Global Equity Markets in 1998," IMF Working Papers 2003/084, International Monetary Fund.
    4. Peter Temin & Hans-Joachim Voth, 2003. "Banking as an Emerging Technology: Hoares Bank 1702-1742," Working Papers 93, Barcelona School of Economics.
    5. Altorfer, Stefan, 2004. "The canton of Berne as an investor on the London capital market in the 18th century," Economic History Working Papers 22336, London School of Economics and Political Science, Department of Economic History.
    6. Michael D. Bordo, 2008. "An Historical Perspective on the Crisis of 2007-2008," NBER Working Papers 14569, National Bureau of Economic Research, Inc.
    7. Sydow, Matthias & Schilte, Aurore & Covi, Giovanni & Deipenbrock, Marija & Del Vecchio, Leonardo & Fiedor, Paweł & Fukker, Gábor & Gehrend, Max & Gourdel, Régis & Grassi, Alberto & Hilberg, Björn & Ka, 2021. "Shock amplification in an interconnected financial system of banks and investment funds," Working Paper Series 2581, European Central Bank.
    8. Rodrigo Cifuentes & Hyun Song Shin & Gianluigi Ferrucci, 2005. "Liquidity Risk and Contagion," Journal of the European Economic Association, MIT Press, vol. 3(2-3), pages 556-566, 04/05.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Claudio Borio & Mathias Drehmann, 2011. "Toward an Operational Framework for Financial Stability: “Fuzzy” Measurement and Its Consequences," Central Banking, Analysis, and Economic Policies Book Series, in: Rodrigo Alfaro (ed.),Financial Stability, Monetary Policy, and Central Banking, edition 1, volume 15, chapter 4, pages 063-123, Central Bank of Chile.
    2. Ilhyock Shim & Goetz von Peter, 2007. "Distress selling and asset market feedback," BIS Working Papers 229, Bank for International Settlements.
    3. Ernest Dautovic, 2019. "Has Regulatory Capital Made Banks Safer? Skin in the Game vs Moral Hazard," Cahiers de Recherches Economiques du Département d'économie 19.03, Université de Lausanne, Faculté des HEC, Département d’économie.
    4. Naiwei Chen & Meiya Chang, 2013. "Financial Crisis and Corporate Liquidity: Implications for Emerging Markets," Asia-Pacific Financial Markets, Springer;Japanese Association of Financial Economics and Engineering, vol. 20(1), pages 1-30, March.
    5. Stephen Morris & Hyun Song Shin, 2004. "Liquidity Black Holes," Review of Finance, Springer, vol. 8(1), pages 1-18.
    6. Adrian, Tobias & Borowiecki, Karol Jan & Tepper, Alexander, 2022. "A leverage-based measure of financial stability," Journal of Financial Intermediation, Elsevier, vol. 51(C).
    7. Ebrahimi Kahou, Mahdi & Lehar, Alfred, 2017. "Macroprudential policy: A review," Journal of Financial Stability, Elsevier, vol. 29(C), pages 92-105.
    8. Ricardo J. Caballero & Arvind Krishnamurthy, 2008. "Collective Risk Management in a Flight to Quality Episode," Journal of Finance, American Finance Association, vol. 63(5), pages 2195-2230, October.
    9. Evan Gatev & Til Schuermann & Philip E. Strahan, 2009. "Managing Bank Liquidity Risk: How Deposit-Loan Synergies Vary with Market Conditions," Review of Financial Studies, Society for Financial Studies, vol. 22(3), pages 995-1020.
    10. Craig H. Furfine & Eli M. Remolona, 2005. "Price discovery in a market under stress: the U.S. Treasury market in fall 1998," Working Paper Series WP-05-06, Federal Reserve Bank of Chicago.
    11. Mark Carey & René M. Stulz, 2007. "The Risks of Financial Institutions," NBER Books, National Bureau of Economic Research, Inc, number care06-1, May.
    12. Winkler, Adalbert, 2001. "On the need for an international lender of last resort: Lessons from domestic financial markets," W.E.P. - Würzburg Economic Papers 28, University of Würzburg, Department of Economics.
    13. Arvind Krishnamurthy, 2010. "Amplification Mechanisms in Liquidity Crises," American Economic Journal: Macroeconomics, American Economic Association, vol. 2(3), pages 1-30, July.
    14. repec:onb:oenbwp:y:2005:i:9:b:1 is not listed on IDEAS
    15. Dwyer Jr., Gerald P. & Samartín, Margarita, 2009. "Why do banks promise to pay par on demand?," Journal of Financial Stability, Elsevier, vol. 5(2), pages 147-169, June.
    16. Donaldson, Jason Roderick & Piacentino, Giorgia & Thakor, Anjan, 2018. "Warehouse banking," Journal of Financial Economics, Elsevier, vol. 129(2), pages 250-267.
    17. MArdi Dungey & Renee Fry & Brenda Gonzales-Hermosillo & Vance L. Martin & Chrismin Tang, 2008. "Are Financial Crises Alike?," CAMA Working Papers 2008-15, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
    18. Kahn, Charles M. & Roberds, William, 2009. "Why pay? An introduction to payments economics," Journal of Financial Intermediation, Elsevier, vol. 18(1), pages 1-23, January.
    19. Evan Gatev & Philip Strahan, 2008. "Liquidity Risk and Syndicate Structure," NBER Working Papers 13802, National Bureau of Economic Research, Inc.
    20. Gilbert Peffer & Barbara Llacay, 2007. "Higher-Order Simulations: Strategic Investment Under Model-Induced Price Patterns," Journal of Artificial Societies and Social Simulation, Journal of Artificial Societies and Social Simulation, vol. 10(2), pages 1-6.
    21. Rajkamal Iyer & José-Luis Peydró, 2011. "Interbank Contagion at Work: Evidence from a Natural Experiment," Review of Financial Studies, Society for Financial Studies, vol. 24(4), pages 1337-1377.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:xrs:sfbmaa:02-46. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Carsten Schmidt (email available below). General contact details of provider: https://edirc.repec.org/data/sfmande.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.