Theoretical Examination of Banking Crisis Models

Abstract

There was no financial crisis during the Bretton Woods Agreement period. As the 1990s ended, a wealth of data on previous crises allowed the authors to better understand the causes of banking crises using econometric methods that integrate macroeconomic and financial variables. Despite the efforts and actions of regulators to control the financial system, we still observe the emergence of a different kind of crisis, which could trigger a financial crisis if financing suddenly and brutally stops and stock prices fall simultaneously. The resulting theory of the banking crisis evolved, revealing four distinct generations. Understanding the causes of instability and fragility piqued the curiosity of the first generation. The second generation focused on bank runs and runs that could lead to crises. The third generation begins to look for vulnerabilities. The fourth generation pays more attention to the institutional framework and laws established to maintain financial stability. This chapter examines these four generations of financial crises.