The Nature of Banking Crises

Abstract

The United States has experienced more than ten banking crises since the beginning of the twentieth century. This chapter begins by outlining a theory that helps us understand why such crises occur over and over again in nations throughout the world. These crises are also seldom confined to a single country—they strongly tend to occur in clusters, with numerous nations almost simultaneously experiencing the same problems. The Great Crisis of 2007–2009 proved to be contagious, quickly spreading from the United States to many parts of the globe. The underlying forces behind this phenomenon and the various channels through which crises are transmitted from country to country are explored in this chapter. Because the Great Crisis caught U.S. officials by surprise, this chapter discusses the contentious issue of whether careful monitoring of emerging patterns may make it possible to foresee or predict crises, and thus take measures to lessen their impact. Finally, the chapter analyzes the macroeconomic fallout from banking crises and explains why the associated economic contractions tend to be more damaging than recessions that occur in the absence of financial crises.