A European Approach to Banking Crises

Abstract

Financial crises happen. More specifically, banking crises happen. Most of the times, these crises have a number of common features, like a combination of adverse market or other external conditions and poor risk management practices. However, we can also observe that banking crises are never identical. For every banking crisis there are different immediate causes. Every setting or situation is different and also the characteristics of the problematic institutions differ. Causes of financial problems can differ widely. The problems can become manifest at the financial institutions themselves, whether these are banks, insurance companies, securities firms or financial conglomerates, as was shown with BCCI and Barings. Shocks can also originate in and be transmitted through financial markets, as was shown by the Asia crisis and the LTCM affair. Moreover, payment and settlement systems can be channels of financial instability, as was feared after the terrorist attacks in September 2001. Finally, the implications of a crisis can be very different, depending on the type of crisis and the type of institution. The type of institution, its relation with other financial institutions, its crossborder linkages and its position on certain financial markets determine, inter alia, whether there is a potential danger for contagion to other markets and institutions.