Systemic Banking Crises Database: An Update

A new IMF Working Paper by Luc Laeven and Fabián Valencia can be read here.  The authors look at the costliest banking crises in terms of fiscal costs, public debt and output losses.  The paragraph beginning on the bottom of page 19 is noteworthy.

Iceland and Ireland also feature among the ten costliest banking crises in terms of overall increase in public debt, with public debt in both cases increasing by more than 70 percent of GDP within four years. In terms of output losses, the ongoing crises in Ireland and Latvia are among the ten costliest banking crises since the 1970s, with output losses exceeding 100 percent in both cases. Ireland holds the undesirable position of being the only country currently undergoing a banking crisis that features among the top-ten of costliest banking crises along all three dimensions, making it the costliest banking crisis in advanced economies since at least the Great Depression. And the crisis in Ireland is still ongoing.

36 thoughts on “Systemic Banking Crises Database: An Update”

  1. “And the crisis in Ireland is still ongoing.”

    There really is no need to add any comment to that summary at the bottom of page 19 Seamus but that one line sums up how ineffectively we are still dealing with things.

    Has anybody been fired yet or gone to jail btw?

  2. @PR Guy

    No they are threatening to go on strike if pay increments aren’t honoured under CP and AIB staff, effectively now public servants, have caught the bug too…Jail? what a notion!

  3. Just wondering if the comparison of the costliest ever banking collapses has a chapter on soft landings.

    I can’t believe what is going on now at AIB with people threatening to go on strike after E20bn of public money.

  4. I think that if this database was extended to before and during the Great Depression, Ireland would still be one of the most expensive in history.

  5. Jaysus!

    Page 9 – Frequency of Systemic Banking Crises Around the World, 1970–2011

    The fact that they need to use a global map and then colour-code for frequency tells everything!

    If the same map represented nuclear accidents or large-scale industrial disasters it would be graphic evidence of a broken system.

    Maybe it’s time to start thinking of the financial system as fundamentally broken…

  6. @Seafoid:

    re:I can’t believe what is going on now at AIB with people threatening to go on strike after E20bn of public money.

    Look at it this way. If somebody is fool enough to prop your employer up with €20 billion without you saying a word, then they have to good enough for a few hundred million just to keep the workers happy; Don’t they?

  7. @ WGU

    the financial system was banjaxed after the dopamine effect of ww2 ran out in the 70s. It has been going through cycles of booms and massive busts since the 1870s which resulted in the race for Africa, WW1, WW2 and Thatcher respectively. This bust is potentially amongst the worst because all the get out of jail debt cards are already used and there is no cheap fuel to get the next party going.

  8. @seafóid

    Yup – with the added insanity this time round of blatant crimes everywhere (MERS/robo-signing in the US, LIBOR rigging in the UK, officially sanctioned share support schemes and bed-and-breakfast arrangements in ireland, etc) and no one goes go jail!

    The lads in Enron must be raging. Bernie Madoff must be regretting pleading guilty.

    If any one of the multitude of known frauds had surfaced pre-2008 they would have made global headlines. Now a fraud on a $450 TRILLION market gets a fine.

    Surreal.

  9. It takes a little girl
    http://www.youtube.com/watch?v=5ij7in_mmVo

    http://www.youtube.com/watch?v=Jg4y4LHDgjw

    Unfortunately many of our economists are big girls blouses unwilling to stand up as it might jeopardize their precious careers.

    The Treasury prints – PRINTS the f$£king money……this will reduce the leverage power the banks have over us.
    The wealth at any given moment will not disappear….it is however disappearing as we halt rational activity to pay fraudulently created and unpayable debt.
    You cannot stop the flow like this – what does it achieve ?
    Entropy………..

    The western treasuries have made a pact with the devil – they sent forth bankers to scour the planet of resourses and send it back to the base of operations -Europe.
    Now that Asia resisted the bankers post 1998 the banks like Locusts are eating the flesh off us all.
    The politicians do not know what to do as their entire career of promises was build around this war bounty.

    We have reached a crossroads again.
    What do we do ?
    Take the hard road or the apparently easier road ?

    http://www.youtube.com/watch?v=63bG2pFvfKQ

  10. @ WGU

    I missed your post.

    The key sentence in the FT report is the following, it seems to me;

    “Under a historical quirk, the daily fixing of Libor has always been considered a private activity run by the British Bankers’ Association although the FSA regulates the participating banks.

    That arrangement made it all but impossible for the FSA to consider criminal enforcement – neither the rate-setting process nor over-the-counter derivatives are covered by its market-abuse powers.”

    As Woody Allen might have said, as historical quirks go it has been one of the best.

  11. All this data going back to the 1970s and the cost in lost output per country and Morgan Kelly could crunch the numbers on the OECD house price crashes- why did the soft landing theory get such an easy ride from the economics wallahs ?

    And I see from today’s IT that some plank is talking up the property market based on one month’s data. Does it never end? Have people no shame ?

    http://www.irishtimes.com/newspaper/opinion/2012/0628/1224318886589.html

  12. Angela M wont be too pleased that two of her careless children, Italy and Spain, have qualified for Euro 2012 final . Football has risen above the pain of their Austerity .

  13. @DOCM

    That’s what makes this innocent, wide-eyed IMF report such a joke!

    When the criminals fund the lawmakers and get them to write laws that excludes criminal activity from regulation you’re bound to get systemic crashes.

    Add the negative incentive of then having access to the public purse to socialise the inevitable losses and…

    ALAKAZAM!

    Systemic Banking Crises – Rinse And Repeat.

  14. @Seafoid
    They should be planning national life support strategies yet we have catfish waiting down the bottom of this sewer waiting to waste any further surplus that comes their way.
    Is is very funny in a sick sort of way.

    I read in the De Paper today they are planning a new town of 13,000 people near Blarney with new roads ,schools ,rail whatever !!!!!
    My once Beautiful city will be hollowed to a even greater degree requiring even more inputs into its precarious existence

    Its a bank credit sickness.
    We need a 2 to 1 credit leverage in the system to give the price signals some rationality and thus prevent skimming from the now devastated & poisoned domestic wealth resourse pool.

    Its Easter Island stuff really.

  15. What happens after each credit bubble is the banks buy “sovergin debt” ( a oxymoron) , our taxes /wealth repair the banks balance sheets and they continue again and again with these malinvestment bubbles until there is no resourses remaining.
    Why not ? nothing is there to stop them.

    I can’t understand why the city squares is not full of Stocks (and I am not talking share certificates )
    What have credit banks got to do with money ?
    They make credit , they don’t make money.
    Why do we reley on them to formulate economic monetary policey ?
    We seem strangely comfortable living with this pox amongest us.

    You can see the beginnings of these credit bastards waiting waiting waiting for the next opportunity to blow the surplus we created on conduit items that transfer wealth to certain people at the expense of general wealth.

  16. From the IMF paper:

    “Figure 1 depicts the frequency of banking crises by month of all banking crises since the 1970s. An interesting pattern emerges: banking crises tend to start in the second half of the year, with large September and December effects.”

    Wait until last years fat bonus payments are paid out, then in September.
    ‘–oops. Those loans we gave out that made us all very rich. Guess what? The loans are not coming back, but we are rich now, and we stay rich.’

    @Dork
    “The Treasury prints – PRINTS the f$£king money……this will reduce the leverage power the banks have over us.
    The wealth at any given moment will not disappear….it is however disappearing as we halt rational activity to pay fraudulently created and unpayable debt.”

    I understood that! Sounds good to me, especially the bit about having halted ‘rational activity….’

  17. @ Dork

    And we get Luscinda and Enda small wonder “we are where we are”. A 12 year old? She reminds me of a very young Meredith Whitney.

  18. Re output loss of 106% in IMF paper

    As far as I can make out this calculation is based on a HP filter of output data for 1988 – 2007. This would give a growth rate for the base of about 6- 7 %. which is much to high for equilibrium trend output. For example a reduction from a 7% base growth rate to a 2.5% growth gives a loss of almost 50% of output. The position is bad enough without some IMF economists passing Irish data into their computer programs without understanding the data and possibly what the programs are doing to the data.

  19. In the case of Ireland, the metric that Laeven and Valencia use substantially overstates the net cost of the Irish credit bubble and bust. Irish GDP in 2000-2006 was substantially increased by the unsunstainable inflow of foreign credit through Irish banks. They measure the decline (from an artificially high peak) in Irish GDP associated with the credit withdrawal but not the prior artificial increase associated with the credit inflow. The sides (credit inflow, large GDP increase then credit outflow, large GDP decrease) are intimately linked. Brian O’Kelly and I have a paper (forthcoming World Economy) which corrects for this one-sided measurement.

  20. @Joseph
    The last rational activity this domestic economy did was back in 86 /87 when we were at the still high 8 to 1 leverage but were choked on “sovergin debt” interest as we were not “growing enough”
    But growing for who ?

    Unfortunetly we meet a crossroads back then and choose the wrong route of increased leverage / bubble economics which gives the wrong input output signal.

    @Robert
    Yeah – she has potential
    I hope she does not take the corporate door.

    http://www.youtube.com/watch?v=AQUeK7nYxBQ

  21. Text from Blind Biddy in Brussells:

    THE CONFLATIONIST FALLACY JUST GOT A GOOD KICK UP THE PROVERBIAL

  22. @ All

    FYI

    http://www.consilium.europa.eu/uedocs/cms_data/docs/pressdata/en/ec/131359.pdf

    The reference to the “flexible” use of the EFSF/ESM is also worth noting. It will need a lot of such in the light of the possible new demands on it which suggests that the idea of leverage through the use of guarantees will come into the frame.

    One assumes that the changes in approach in the ESM are possible within the existing wording i.e. decisions to be taken by its governing authority.

  23. @DOCM

    I did not think it would happen. It is a major breakthrough.
    It must have taken the cheers for Balotelli’s second goal for Merkel and the German officials to realise how truly isolated they were.

    In any case, it looks like the ESM is to be a funded bank resolution corporation of some sort.
    Banks are no longer Masters of their Sovereigns.
    It a pity that so much destruction had to happen to get to that pretty basic point.
    Better late than never.

  24. It would be ungraceful of me not to use this opportunity to thank the following for their aid during the referendum no campaign. Sincere thanks to Michael Hennigan of FinFacts,Bloomberg TV, France 24 TV,Spanish TV,Thomson Reuters,Danish newspapers,De Telegraaf Holland, RTE radio Morning Ireland, Newstalk downtobusiness and BBC radio which organised the joint broadcast with Paul Krugman. I am sure I have omitted many and for that I apologise.

    http://www.rte.ie/news/morningireland/player.html?20120514%2C3285548%2C3285548%2Cflash%2C257

  25. @ Joseph Ryan

    Very true! Apart from the football, another element was, IMHO, the manner in which Merkel shot herself in the foot with her “as long as I live” comment. The Barclay’s scandal also arrived at an opportune moment, if one can use the phrase. Without it Cameron would be being invited to exercise his veto on the necessary unanimous political decision, finally, to use the existing treaty provisions to give the ECB the supervisory role that it should have been given from the outset. The mechanics involved are likely to prove contentious.

  26. @DOCM
    What is the significance / topic of the Bundestag debate today that was referred to on Morning Ireland earlier this am. I did not get its import.

  27. And the crisis is still ongoing. Analysing where money comes from could provide the answer why.

    Before the 70s a far bigger proportion of the money supply existed as cash ad the remainder, bank-account money, was restricted in use through the limitations of the chequebook.

    With the rise of the computer our use of bank-account money has exploded and cash now forms only 3% of the Eurozone money supply.

    This is significant because for new cash to come into the economy it is printed and ultimately it’s spent into circulation as a permanent addition to the money supply.

    Bank-account money on the other hand is created by banks through loans and so every bank-account euro has a corresponding debt to the banking sector. Bank-account money is also quite temporary because as a loan is repaid to a bank the bank-account money no longer exists.

    With 97% of our money existing only as a temporary medium of exchange this is a very unique recession. For this system to function well we need to take on more debt than we repay. So far this has happened primarily through mortgages taking longer and longer to repay. However, we’ve reached the natural limit now whereby mortgages take two concurrent careers to repay and cannot increase further.

    We can no longer expect bank loans to be a sufficient source of new money for the foreseeable future and ultimately we need another source of money to service the modern economy. Not many have recognised this and so the crisis is ongoing.

  28. @ Joseph Ryan

    Merkel accepted from the outset that a two-thirds majority in the Bundestag was necessary for the fiscal treaty but only reluctantly accepted that this was also required for the ESM – according to press reports – when the opposition insisted on linking the two and making the adoption of a growth pact a condition of their acceptance (SPD and Greens).

    What it all boiled down to is that they arranged the timing of the vote in such a way so as to mark Merkel’s cards and they finally, rather than Italy and Spain, as far as I can see, cornered her.

    It does not seem to me that there is any risk to the deal being voted through now that the junior partner in the government, the FPD, is also on board (if I undertood what the Tánaiste had to say this morning).

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