Financial crises and financial reforms in Spain : what have we learned?.

Like the rest of the world, Spain has suffered frequent financial crises and undergone several changes in its regulatory framework. There have been crises that have been followed by reforms of the financial structure, and also troubled financial times with no modification of the regulatory and supervisory regime. In various instances, regulatory changes have predated financial crises, but in others banking crises have occurred without reference to changes in the regulatory regime. Regulation and supervision has been usually absent in the XIXth century, while in the XXth century policy makers have been more active and diligent. Moreover, all major financial crises have been followed by intense financial restructuring, although as elsewhere banking restructuring and interventions not always have been successful (in fact, the cases of failures and mixed results overcome the successful cases). The paper provides a short history of the major financial crises in Spain from 1856 to the present, and also reviews the main financial reforms and the distinctive regulatory regimes that have been in place in this last 150 years time span.Spanish banking; Financial crisis; Financial regulations; Banking reforms;

The Paris financial market in the 19th century: an efficient multi-polar organization?

The literature in financial history usually considers London as the only centre of the late 19th century's financial globalization, and explains it at least in part by the efficient microstructure (organization) of the London Stock Exchange (LSE). The LSE is characterized as having been a little regulated market, where entry was easy both for traders and issuers [Michie (1998), Neal (2004), White (2006)]. The LSE microstructure is also considered as the natural and optimal one by much of the theoretical literature on stock markets, which argues that free entry decreases transaction costs and increases both liquidity and diversification, resulting in economies of scale attracting traders, issuers and buyers. Our paper tries to explain why the Paris Bourse was able to be so successful in spite of the supposedly inefficient monopoly and regulations that the State imposed it. We focus on the fact that the Paris market actually included several different market places: the Parquet (the official Bourse, organized by the agents de change), the Coulisse, the Marché libre, and inter-bank direct operations. We argue that this multi-polar organization, was efficient, relying on the specialization it allowed, and the complementarities it helped develop among markets. We incorporate in the discussion the recent theoretical literature that shows that no single market can satisfy the heterogeneous preferences of all issuers and investors, so that a multi-polar organization can be a superior solution. We demonstrate our claim by looking not only at the rules but also at the actual functioning of the Parquet thanks to its archives which we recently classified. These archives also allow us to build new statistical series which permit evaluating the performances of the Parquet during the 19th century: volumes traded, seat prices, transaction costs, and operational risks. If one supposes that the Parquet was the least efficient segment of the Parisian market, this will provide us with a lower bound for the global efficiency of that market, which should be compared with other markets on similar concrete grounds.Paris Stock exchange ; microstructure ; monopoly ; regulation

This Time It’s Different: Eight Centuries of Financial Folly-Chapter 1

Throughout history, rich and poor countries alike have been lending, borrowing, crashing--and recovering--their way through an extraordinary range of financial crises. Each time, the experts have chimed, "this time is different"--claiming that the old rules of valuation no longer apply and that the new situation bears little similarity to past disasters. We stress that premise is wrong. Covering sixty-six countries across five continents, This Time Is Different presents a comprehensive look at the varieties of financial crises, and guides us through eight astonishing centuries of government defaults, banking panics, and inflationary spikes--from medieval currency debasements to today's subprime catastrophe. We argue that financial combustions are universal rites of passage for emerging and established market nations. The authors draw important lessons from history to show us how much--or how little--we have learned. We document that financial fallouts occur in clusters and strike with surprisingly consistent frequency, duration, and ferocity. We examine the patterns of currency crashes, high and hyperinflation, and government defaults on international and domestic debts--as well as the cycles in housing and equity prices, capital flows, unemployment, and government revenues around these crises. While countries do weather their financial storms, we show that short memories make it all too easy for crises to recur.banking and financial crises, currency crash, inflation, debt, default, recession

Business fluctuations in a behavioral switching model: Gridlock effects and credit crunch phenomena in financial networks

In this paper we characterize the evolution over time of a credit network in the most general terms as a system of interacting banks and firms operating in a three-sector economy with goods, credit and interbank market. Credit connections change over time via an evolving fitness measure depending from lenders’ supply of liquidity and borrowers’ demand of credit. Moreover, an endogenous learning mechanism allows agents to switch between a loyal or a shopping-around strategy according to their degree of satisfaction. The crucial question we investigate is how financial bubbles and credit-crunch phenomena emerge from the implemented mechanism

Relative Price Volatility Under Sudden Stops: The Relevance of Balance Sheet Effects

Sudden Stops are associated with increased volatility in relative prices. We introduce a model based on information acquisition to rationalize this increased volatility. An empirical analysis of the conditional variance of the wholesale price to consumer price ratio using panel ARCH techniques confirms the relevance of Sudden Stops and potential balance-sheet effects as key determinants of relative-price volatility, where balance-sheet effects are captured by the interaction of a proxy for potential changes in the real exchange rate (linked to the degree of external leverage of the absorption of tradable goods) and a measure of domestic liability dollarization.

Financial crises and financial reforms in Spain : what have we learned?

Like the rest of the world, Spain has suffered frequent financial crises and undergone several changes in its regulatory framework. There have been crises that have been followed by reforms of the financial structure, and also troubled financial times with no modification of the regulatory and supervisory regime. In various instances, regulatory changes have predated financial crises, but in others banking crises have occurred without reference to changes in the regulatory regime. Regulation and supervision has been usually absent in the XIXth century, while in the XXth century policy makers have been more active and diligent. Moreover, all major financial crises have been followed by intense financial restructuring, although as elsewhere banking restructuring and interventions not always have been successful (in fact, the cases of failures and mixed results overcome the successful cases). The paper provides a short history of the major financial crises in Spain from 1856 to the present, and also reviews the main financial reforms and the distinctive regulatory regimes that have been in place in this last 150 years time span

Stability Versus Instability In The Context Of Financial Globalization

The financial environment has undergone a profound transformation in the context of globalization, financial flows of scale, diversification of financial instruments, increasing interdeperndence of national financial markets, being of critical importance. However, while global financial markets play a crucial role in the distribution of global capital, they do so in a way that can have profound negative implications. This paper tries to demonstrate that, globalization is capable of causing instability in the whole world, enabling broad crises, and, not least, increasing the danger of recession in the world, based on the manifestation of the global systemic risk. Knowing the risks and distortions that can affect the stability of the financial sector in the context of financial globalizaton, as well as their consequences, is especially important for the design of the regulation and surveillance process, plus for the formulation of crisis remedial and prevention actions.financial globalization, crises, volatility, systemic rik

Credit derivatives, macro risks, and systemic risks

This paper explores some bigger-picture risks associated with credit derivatives. Drawing a distinction between the market's perception of credit and "real credit" as reflected in the formal definition of a credit event, the author examines the well-documented macro drivers of credit generally. ; The author next enumerates frequently cited concerns with credit derivatives: the exceedingly large notional trade in credit default swaps relative to outstanding debt, the increasing involvement of hedge funds in these products, and operational concerns that have surfaced in the past year or two. ; The paper then considers the possibilities of associated systemic risk, looking at the issues of modeling and proper hedging, risk management, and valuation of new and sometimes complex credit derivative instruments. ; Despite the inherent risks involved in credit derivatives, the market for these instruments continues to grow rapidly as people find them practical and beneficial for hedging risk, generating income, and distributing credit risk among a broader institutional base. Evolving market practices and safeguards should help establish a more efficient, transparent marketplace. Whether credit risk is best allocated outside of the traditional financial intermediaries remains an open question.Credit derivatives ; Risk

Liberalization, Growth, and Financial Crises: Lessons from Mexico and the Developing World

Although the case for trade liberalization is now well established, the case for financial liberalization is not, because the latter is associated with lending booms and crises. Some critics invoke as evidence the recent weak growth of Mexico, a prominent liberalizer. We argue that liberalization is beneficial despite the occurrence of crises. First, we show that financial liberalization has typically followed trade liberalization, and that both have led to faster growth, despite more frequent booms and busts. Second, we present a model that shows why, in countries with severe credit market imperfections, liberalization leads to faster growth and, as a by-product, to financial fragility. Third, comparing Mexico with this international norm, we show that liberalization and NAFTA have induced faster growth and investment but have not been enough: lack of structural reform and a protracted credit crunch generated bottlenecks that blocked further growth and led to a slowdown in exports.Mexico, bank, growth, financial crisis, macroeconomics

Crises and Growth: A Re-Evaluation

We address the question of whether growth and welfare can be higher in crisis prone economies. First, we show that there is a robust empirical link between per-capita GDP growth and negative skewness of credit growth across countries with active financial markets. That is, countries that have experienced occasional crises have grown on average faster than countries with smooth credit conditions. We then present a two-sector endogenous growth model in which financial crises can occur, and analyze the relationship between financial fragility and growth. The underlying credit market imperfections generate borrowing constraints, bottlenecks and low growth. We show that under certain conditions endogenous real exchange rate risk arises and firms find it optimal to take on credit risk in the form of currency mismatch. Along such a risky path average growth is higher, but self-fulfilling crises occur occasionally. Furthermore, we establish conditions under which the adoption of credit risk is welfare improving and brings the allocation nearer to the Pareto optimal level. The design of the model is motivated by several features of recent crises: credit risk in the form of foreign currency denominated debt; costly crises that generate firesales and widespread bankruptcies; and asymmetric sectorial responses, where the nontradables sector falls more than the tradables sector in the wake of crises.