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An analysis of the causes of recent banking crises

  • David T. Llewellyn
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    The incidence of systemic banking crises has risen over the past twenty years and the costs have been high. Although each country's experience has country-specific factors, several common elements appear in most crisis countries: (1) volatility in the macro economy; (2) the inheritance of structural weaknesses in the economy and financial system; (3) hazardous banking practices; (4) hazardous incentive structures and moral hazard within the financial system; (5) ineffective regulation; (6) weak monitoring and supervision by official agencies; (7) the absence of effective market discipline on banks, and (8) structurally unsound corporate governance mechanisms within banks and their borrowing customers. Causes of such crises are complex and a myopic focus on single factors (e. g. instability in the macro economy, weak regulation, etc.) misses the essential feature of interrelated and multidimensional causal factors. Although macro-instability has been a common feature, and may often have been the proximate cause, banking crises usually emerge because instability in the economy reveals existing weaknesses within the banking system.

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    Article provided by Taylor & Francis Journals in its journal The European Journal of Finance.

    Volume (Year): 8 (2002)
    Issue (Month): 2 (June)
    Pages: 152-175

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    Handle: RePEc:taf:eurjfi:v:8:y:2002:i:2:p:152-175
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    1. Richard Brealey, 1999. "The Asian Crisis: Lessons For Crisis Management And Prevention," Journal of Applied Corporate Finance, Morgan Stanley, vol. 12(3), pages 111-124.
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    13. 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.
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    16. Caprio Jr., Gerard, 1997. "Safe and sound banking in developing countries : we're not in Kansas anymore," Policy Research Working Paper Series 1739, The World Bank.
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