Banking Crises

By Calomiris, Charles W. | NBER Reporter, Winter 2008 | Go to article overview
Save to active project

Banking Crises

Calomiris, Charles W., NBER Reporter

The current global financial crisis grew out of banking losses in the United States related to subprime lending. How well do economists understand the origins of such crises and how they spread? Was this crisis something new or a replay of familiar historical phenomena? Will policy interventions be able to mitigate its costs ? The history of banking crises provides informative perspectives on these and other important questions.

Crises Are Not All the Same

When considering the history of banking crises, it is useful to distinguish between two phenomena associated with banking system distress: exogenous shocks that produce insolvency, and pressures on banks that arise from rapid withdrawals of debt or failures to rollover debt during "panics." These two contributors to distress often do not coincide. For example, in the rural United States during the 1920s, large declines in agricultural prices cause many banks to fail, often with high losses to depositors, but those failures were not associated with systemic panics. (2) In 1907, the opposite pattern was visible. The United States experienced a systemic panic, originating in New York, which was precipitated by small aggregate shocks but had large short-term systemic effects associated with widespread withdrawals of deposits. Although some banks failed in 1907, failures and depositor losses were not much higher than in normal times. (3) That crisis was resolved only after banks had suspended convertibility and after uncertainty about the incidence of the shock had been resolved.

The central differences between these two episodes relate to the information about the shocks producing loan losses. In the 1920s, the shocks were loan losses in agricultural banks, geographically isolated and fairly transparent. Banks failed without subsequent system-wide concerns. During 1907, although the ultimate losses for New York banks were small, the incidence of the shock was not clear (loan losses reflected complex connections to securities market transactions, with uncertain consequences for some New York banks).

Sometimes, large loan losses and confusion regarding their incidence occur together. In Chicago in mid-1932, for example, large losses resulted in many failures and also in widespread withdrawals from banks that did not ultimately fail. Despite the confusion about the incidence of the shock, and the consequent widespread temporary disruptions to the financial system, the banks that failed were exogenously insolvent; solvent Chicago banks experiencing withdrawals did not fail. In other episodes, however, bank failures may have reflected illiquidity resulting from runs, rather than exogenous insolvency. (4)

Today's financial turmoil is closer to the Chicago experience in 1932 than to either the banking shocks of the 1920s or those of 1907. (5) The shock that prompted the turmoil was of moderate size (subprime and Alt-A loans totaled roughly $3 trillion, including those on the balance sheets of Fannie Mae and Freddie Mac, and total losses are likely to generate total losses of roughly half a trillion dollars), and its consequences were significant for both solvent and insolvent banks. Unlike the Chicago Panic, today's turmoil probably has produced the failures of financial institutions that were arguably solvent prior to their liquidity problems (for example, Bear Stearns).

Banking crises can differ according to whether they coincide with other financial events. Banking crises coinciding with currency collapse are called "twin" crises (as in Argentina in 1890 and 2001, Mexico in 1995, and Thailand, Indonesia, and Korea in 1997). A twin crisis can reflect two different chains of causation: an expected devaluation may encourage deposit withdrawal to convert to hard currency before devaluation (as in the United States in early 1933); or, a banking crisis can cause devaluation, either through its adverse effects on aggregate demand or by affecting the supply of money (when a costly bank bailout prompts monetization of government bailout costs).

The rest of this article is only available to active members of Questia

Sign up now for a free, 1-day trial and receive full access to:

  • Questia's entire collection
  • Automatic bibliography creation
  • More helpful research tools like notes, citations, and highlights
  • Ad-free environment

Already a member? Log in now.

Notes for this article

Add a new note
If you are trying to select text to create highlights or citations, remember that you must now click or tap on the first word, and then click or tap on the last word.
Loading One moment ...
Project items
Cite this article

Cited article

Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

Cited article

Banking Crises


Text size Smaller Larger
Search within

Search within this article

Look up

Look up a word

  • Dictionary
  • Thesaurus
Please submit a word or phrase above.
Print this page

Print this page

Why can't I print more than one page at a time?

While we understand printed pages are helpful to our users, this limitation is necessary to help protect our publishers' copyrighted material and prevent its unlawful distribution. We are sorry for any inconvenience.
Full screen

matching results for page

Cited passage

Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

Cited passage

Welcome to the new Questia Reader

The Questia Reader has been updated to provide you with an even better online reading experience.  It is now 100% Responsive, which means you can read our books and articles on any sized device you wish.  All of your favorite tools like notes, highlights, and citations are still here, but the way you select text has been updated to be easier to use, especially on touchscreen devices.  Here's how:

1. Click or tap the first word you want to select.
2. Click or tap the last word you want to select.

OK, got it!

Thanks for trying Questia!

Please continue trying out our research tools, but please note, full functionality is available only to our active members.

Your work will be lost once you leave this Web page.

For full access in an ad-free environment, sign up now for a FREE, 1-day trial.

Already a member? Log in now.

Are you sure you want to delete this highlight?