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  • Print publication year: 2011
  • Online publication date: November 2011

3 - Interest rate policies and stability of banking systems

Summary

Introduction

The frequency of severe banking crisis has increased significantly over the last few decades, with the current global crisis likely to be the most costly so far. A banking crisis occurs when a large number of banks fail to meet regulatory capital requirements, are illiquid, or even insolvent. There are at least four empirical facts concerning banking crises which are important from a macroeconomic perspective.

First, banking crises are most often caused by economic downturns. In differentiating between the sunspot view and the business cycle view of banking crises, Gorton (1988) shows in a seminal empirical investigation that bank panics are systematically linked to business cycles. Subsequent work by Demirgüç-Kunt and Detragiache (1998), González-Hermosillo et al. (1997) and Kaminsky and Reinhart (1999) identify a number of factors causing financial fragilities which may ultimately lead to a systemic banking crisis. These results suggest that banking crises tend to occur when the macroeconomic environment is weak, particularly when output growth is low.

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Interest Rates, Prices and Liquidity
  • Online ISBN: 9781139044233
  • Book DOI: https://doi.org/10.1017/CBO9781139044233
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