Distinct Subset Of Financial Crisis

Published Date: 02 Nov 2017

A banking crisis, it was known as the distinct subset of financial crisis as it could be damaging and contagious either individually or concurrently with financial distress or financial panic, or both. The phenomenon of a systemic banking crisis often occurs when the country’s banking industry is experiencing a significant amount of defaults and meanwhile dealing with issues relating to financial contracts. As banks default or fail to fulfill the heavy demand of depositors trying to withdraw money, the collective failure would result to the banking crisis and the local authority would be required to intervene.

In a more specific term, banking crisis could be individually or concurrently with a sovereign debt crisis or a currency crisis. A sovereign crisis, only occurs when the government fails to make payment on its own debt either partially or fully. However, the current difficulties of any countries do not constitute or qualify as a sovereign debt crisis provided that if the country itself does not default in payment. To indicate more information on the banking crisis, the sovereign debt crisis that happened in the European countries is worthy of discussion due to the complex combination of different factors. These factors included the international trade imbalances, the global recession, the global financial crisis and etc. In fact, the intensifying sovereign debt crisis in the European countries had been expanded into a wider financial sector crisis, specifically, the banking crisis. For instance, during the mid to late of 1990s, Ireland had experienced outstanding economic growth due to the construction and housing boom. In order to fulfill the growing demand, Irish banks had financed much mortgage loans through borrowing, in particular, from the international lenders. However, as the housing demand decreased over years, the payment of loans began to fall behind due to the weak economy and eventually leaving the Irish banks unable to repay the lenders. Even so the government of Ireland intervenes, but due to the lack of fund, the country eventually fallen into sovereign debt crisis and so the banking crisis.

A currency crisis is one of the typical financial crises that are interrelated to the banking crisis. Even so there are arguments claiming that the banking crisis always happens prior to the currency crisis, yet, there are also supporting articles stating that the currency crisis precedes the banking crisis. However, the causality between the currency crisis and the banking crisis could not be determined provided that each country has its own policy (Chong-Sup Kim, 1999). According to Silvio Cotessi and Hoda El-Ghazaly (2011), they agree that a currency crisis is a circumstance when a country experiences a nominal depreciation on its currency of at least 30 percent, as well, the rate of depreciation increases by at least 10 percent compared with a year earlier. To illustrate, the Thai currency crisis is one of the good examples. During the Asian crisis of the late 1990s, Thai Baht had depreciated rapidly by over 80 percent. In order to defend the bath against speculative attack, the local government spent almost 90 percent of its foreign reserves. However, associates with the large social cost during the severe recession, the crises had saddled the Thai government with huge liabilities and this had intensified the crisis and eventually led into the banking crisis. From this issue, there were at least 56 insolvent finance companies and one commercial bank was forced to shut down, leaving the other financial institution suffering from financial panic.

Over the past few decades, many analysis, studies and researchers have been done to determine the macroeconomic factors that may influence the stability of the banking system as well as the reasons behind the banking crises. History has shown that the banking system was vulnerable to changes in economic conditions, financial markets as well as the political changes. For example, the changes growth of GDP, exchange rates, monetary policy even the banking law may result a severe banking crisis. Besides, banking crises arose both in developed and developing countries since the early of 20th century started from United States Bank panic in 1907, Great depression in 1930s, Finnish banking crisis in 1990s, Subprime crisis in 2007 and Irish banking crisis in 2008. In short, bank failures have raised widespread concern as the impacts are very immense such as the disruption the flow of credit to households and businesses, shrinking the investment and consumption even forcing practical businesses into bankruptcy. Therefore, it is important for economist and policy makers to study the roots of the banking crises to prevent the future crises.

2.0 The Determinants of The Banking Crisis

Banking Crisis refers to a bank run or a bank panic situation where people started to lose faith in the bank and start withdrawing a big portion or all savings from the bank. Thus this would lead to the huge withdraw of fund from the bank which could cause liquidity problem. Meanwhile , the bank would not have enough funds to carry out their operation and investment and thus would lead to the shutdown of bank branches. On the other hand, banking crisis can slow down the economic growth as the banks are playing important roles to ensure the supply and demand of the country are well managed. In addition, the other major problem such as unemployment, inflation and others will occur if the banking crisis problem were not solving immediately with any fiscal policy. The five main determinants of the banking crisis are the real GDP (Gross Domestic Production), inflation rate, credit growth, exchange rate and term of trade.

2.1 Real GDP

The growth of Real GDP is one of the variables in the macroeconomic and none other than that it’s a significant variable to the banking crisis. There is a negative relationship between then real GDP and banking crisis (Beck, 2006). For instance, a decline in the real GDP growth will cause an increase in the likelihood of banking crises (Hagen & Ho, 2007). According to Klomp (2010), he says that the increase in real GDP would result to an enhancement of the entire banking system. As well, the higher the GDP would reduce the chances of economic instability (Klomp & Haah, 2008). In fact, the greater production of the people achieved will lead to greater income and abilities to re-pay the debts. People are less likely to default when the economic growth rapidly and profitably. In addition, lower GDP growth would lead to a greater possibility of a banking crisis (Demirguc-Kunt & Detragiache, 1998 ; Duttagupta & Cashin 2011).

2.2 Inflation

The inflation rate is a positive significant variable to the banking crisis (Demirguc-Kunt & Detragiache, 1998, Klomp 2010). According to Hagen and Ho (2007), the period of low interest rate tends to be followed by monetary contractions to combat inflation, which may tend induce to a higher probability of banking crises. For instance, during inflation the banks have to raise the nominal deposit rates to attract people. However, if the bank failed to get the nominal returns, the bank might run out in insolvency. Besides that, interest rates are highly significant with the banking crisis (Beck, 2006) associated with the inflation. As such, during a period of high inflation, one could not predict the profit and would subsequently lose faith in the bank as the bank might find it difficult to access to the credit quality.

2.3 Credit Growth

Credit growth is one of the variable to explain the banking crisis (Domac & Peria, 2002 ; Beck 2006 ). For example, a positive credit growth would result to a higher probability for the banking crisis to occur (Duttagupta & Cashin, 2011). An excessive of bank credit growth would dry up the bank liquidity abilities as a result of banking crisis such as excessive personal credit. According to Duttagupta and Cashin, if the credit growth may lead to create issues such as excessive liability dollarization of banks which could promote crisis to be happening. In fact, liquidity problem is one of the top ranked variables to determine the banking crises. For instance, a high rate of credit expansion may create an asset bubble and when it burst it will become a crisis. According to Büyükkarabacak & Valev (2010), household credit growth has become an important predictor of banking crises nowadays as the rapid household credit growth can cause instability to the bank.

2.4 Exchange rate

The exchange rate is an important variable to explain the banking crisis (Domac & Peria, 2002). As according to Domac and Peria, exchange based monetary strategy could reduce the occurrences of banking crises. Meanwhile, according to Duttagupta and Cashin, exchange rates could induce the happening rate of banking crisis where it could lead the customers to fail in paying their debts. However, even in a situation where the exchange rate is stable, the crisis could happen in a way that if its foreign exchange rates combined with some problems such as liquidity. In fact, a large nominal depreciation could result in banking crisis if the bank is exposed to the foreign exchange risk. According to Goldstein ad Turner, the best indicator of the banking crisis is none other than over-valued exchange rate. In addition, a larger exchange movement will lead to banking crises (Duttagupta & Cashin, 2011). On the other hand, according to Domac & Peria (2003), exchange rate stability can reduce the probability of banking crises, especially in developing countries.

2.5 Term of Trade

The term of trade is a negative significant variable that could lead to the banking crisis (Beck, 2006). For instance, when the terms of trade are low there is a higher probability of banking crisis occurrences. Moreover, a declining in terms of trade growth will result in macroeconomic instability (Duttagupta & Cashin, 2011). In addition, terms of trade or foreign demand ordinarily affect performance on the current account which represents one crucial source of liquidity change, which has a strong impact upon financial institutions’ positions or potential (Pholphirul, 2008). For example, deterioration of terms of trade could weaken debt-servicing capacity of banks’ customers and it may reduce foreign investors’ confidence thus lead to capital outflows, exchange rate depreciation, and substantial losses to financial institutions’ cash flow positions.

3.0 Types of Banking Crisis

3.1 Banking Crises during Great Depression

Great depression can be defined as the longest and most severe economic recession began in early of the 1930s and lasted until the 1940s. The depression was originated in the United States in 1930 resulted critical slump in the economic and financial system in the country, however the impacts do not end in the United States but caused harsh decays in production, acute unemployment and intense deflation to the rest of the country. In term of social and cultural effect, the depression has caused hunger, tremendous levels of poverty and political unrest especially in the United States. According to Brian Duignan (2012), the Great depression is one of the grimmest tribulations faced by the United States citizen since the Civil War. In short, the industrialized Western world has experienced structural changes in macroeconomic policy, economic theory and institution in the Great depression.

The main reason behind the Great depression have been argued by many researchers which include the failure of monetary policy, large labor market failure, bank failure, stock market crash etc. There is no single factor can contribute to the depression, however a combination of domestic and worldwide circumstances. The origin of the Great depression began with the stock market crash in 1929 but prior to the event of a crash, the stock market was bull and its overall value has risen drastically (White, 1990). In 1920s, the United States were experiencing the decade of expansion as the recovery from World 1War. For example, gold reserves stored by the country reflected in the credit availability of citizen, financial innovations in modern investment trust, and technology development in automobiles. In addition, the real estate especially the Wall Street undergoes boom in the year 1928 and thus increase the consumer spending. However, the boom has generated little inflationary pressure in the United States as well as the other countries (Eichengreen and Mitchener, 2003).

In spite of inflated stock prices and to prevent financial speculation, Federal Reserve in US has finally tightened the monetary policies by increase the real interest rates and reserve requirement in 1929. Immediately, the lending to investors in the stock market decline drastically, leading critical financial constrain to market participant. People start to reduce their spending and consumption especially in investment (Romer, 1990). As a result, the deflation has threatened the firmness of the economy and financial system in the United States. Investors and speculators have lost their confidence in the stock market and started to worry about their investment. In October 1929 (also known as Black Tuesday and Thursday ), the shares prices dropped drastically as the demand of stock is nearly zero and speculators exit the market as they failed to respond to the margin calls. Therefore, the value of the companies’ stock experienced nose-dives and forced to leave their businesses which in turn drive to the high unemployment rate. Millions of Americans lost their fortunes and jobs, finally led to panic to the nation and worldwide.

On the other hand, the failure of banks and other financial institutions also contributed to the Great depression. In 1920s, a financial system in the United States was made up by small and independent banks as there are abundant of regulations and laws limiting the branch banking at state and national level (Klebaner, 1974). However, during the credit expansion in 1920s, banks and the financial institutions have provided excessive volume of credit to investors to finance their investments especially in the stock market and real estates. Due to plenty of brokers’ loans and low real interest rates, investors were motivated to invest in riskier investments. Therefore, when the central bank imposed higher interest to prevent financial speculation and a stock market crash in 1929, large amount of loan were defaults intensely and led to bank panic. Liquidity of banks and financial institutions became insolvent which arouses investors and depositors to withdraw their savings in order to prevent further losses. The banks have to sell more assets at lower prices to gain liquidity to repay them. In return, many banks in the United States were forced to bankrupt. For example, about 10000 banks and financial institutions closed in between 1930 and 1933 and these phenomena stopped when the banking holiday began to restore the soundness and confidence of bank (Richardson, 2006).

For the aforementioned reasons, there is no doubt that the stock market crash and failure of federal monetary policies and banks are the main reasons contributed to Great depression. The credit boom in 1920s has gone wrong due to inappropriate decision which should be a cautionary for today’s policy maker as the depression not only affect the financial system, but also affect the society and policy decision both in the United States and other countries.

3.2 Argentina Banking Crisis

The Argentina, it was one of the countries that were repeatedly affected by the banking crisis. Over the past 30 years, the Argentina has experienced four banking crisis, respectively, on 1980, 1989, 1995, and 2001. The foremost overt signs of the banking crisis were the failure of a large private bank, the Banco de Intercambio Regional, on 1980. Indeed, the Banco de Intercambio Regional is a large bank in Argentina with 96 branches over the states. However, due to the highly unstable macroeconomic and financial policy in 1980, the Banco de Intercambio Regional had failed in operation and had led to runs on three other banks in Argentina, as well, intervened by the local central bank almost immediately soon after. To indicate more information, the failures of the Banco de Intercambio Regional had resulted as important losses to its depositors notifying that dollar depositors lost everything while peso depositors lost the fraction uncovered by deposit insurance. The failure had eventually attracted the attention of the public and it was acutely aware. As the financial panic arose, people started to withdraw money from the insolvent institution and deposit towards the solvent. Given these facts, in between of the year of 1980 and of 1982, there were more than 70 institutions were found liquidated and the estimated loss was approximately 55.3% of GDP (Kaminsky, 2003).

While during the 1989, the major discrepancy compared to the crisis happened in the year 1980 was that the earlier is related to the insolvency of the private sector while the later was due to the government insolvency. In fact, the banking crisis in 1989 had occurred during a period of hyperinflation associated with the extreme negative real interest rates and highly unfavorable exchange rates. To indicate doubt, the bank of Argentina became a peculiarity in the late 1980s due to the debt crisis earlier. Meanwhile, associated with the for ever-increasing nominal interest rates to compensate the ever-increasing inflation rates and devaluation risks, the fiscal account has gone out of control as the inflation rose. Likewise, the increased dollarization issue had tended to aggravate the problem. Given these facts, the fiscal accounts gone worsened so did the bonds value in which it eventually shrank the government’s asset value and caused the solvency issue in the government banking system. To conclude, during the banking finance in 1989, the Argentina has incurred a lost in its financial system with liquid liabilities as a percentage of GDP falling to 5 percent and with a serious problem in the banking sector due upon the government solvency issue (Pou, 1997).

Unlike the previous banking crisis happened in the year 1980 and 1989, the banking crisis occurred in the year 1995 was a crisis of liquidity due upon external contagion, the Tequila crisis. The Tequila crisis was commonly known as the Mexican peso crisis, as well, the liquidity shock to the Argentina. Likewise, the incident of currency devaluation and deposit allocation had triggered the need for a greater capital strength and liquidity in the Argentina’s banking system as the depositors tended to withdraw more funds from these respective banks that had exhibited a weaker fundamentals. Given the information, the Tequila crisis contagion in the Argentina had led to the fall in deposits which directed to the decrease in stocks’ and bonds’ price. The liquidity issue was then arisen and subsequently affected the nominal interest rate with a critical increase which eventually led to bank run and banking crisis (Dabos and Gomez Mera, 1999).

Likewise, the Argentina banking crisis in the year 2001 was differed from the typical banking crisis that occurred in the earlier period. The banking crisis occurred in the year 2001 was mainly due upon the fiscal issues. To illustrate, the banking system was relatively in good shaped before the government forcing banks to purchase a large number of government debt due to the government’s fiscal issue. As the market confidence in the Argentina’s government slumped dramatically, the U.S. Treasuries and government debt had soared to more than 2,500 basis points which eventually led to a sharp fall in the price of these securities. Financial Panic or banking panic was then arisen due to the losses on government debt, as well, the rising of bad loans due to the doubts on solvency issue. As people tended to withdraw the pesos from banks for dollars, the weakened banks went further devastated (Contessi and El-Ghazaly, 2011). To conclude, the deposit outflow in Argentina had led to the suspension of convertibility of a large amount of deposit in which it eventually led to losses of more than $8 billion of deposits in the late of 2001.

3.3 Finnish Banking Crisis

Over the past decades, Finnish banking was experiencing an intense boom in 1980s and sharp burst in the early of 1990s. The intensity of this boom bust cycle is unique in the economic history of Finland. This is because Finland traditionally has well developed social system and full employment, however ended up in a deep systematic financial crisis with the drastic decline in real output, intense rise in unemployment and finally lead to government deficits and affect the entire financial sector. In early of 1990s, Finnish banking crisis becomes one of the most critical ever issue in the Nordic countries. According to Halme L. (2002), Finnish banking crisis rooted from a combination of economic turbulence, bank regulation, financial liberalization, and bank specific problems.

In Finland, deposit bank is central to the financial system as it’s not only important source of finance, but also has intense control over many companies. Before 1980s, Finnish banking system and its financial markets are strongly regulated. The capital exports and imports were tightly regulated by the central bank, leads to the quantitative restriction of cross border borrowing and lending. Besides, the bank loans and deposits’ interest rates also highly regulated directly by the central bank at low levels as aftermath of high inflation. The tax system imposed in borrowing has firmly constrained households and enterprise in their choice of loans. Consequently, these regulations have induced an independent and equilibrium credit rationing. However, in the early of 1980s, the domestic financial market in Finland was deregulated. The deregulation allows the capital imports and pricing of bank lending liberalized in an important way. During the financial liberalization, Finnish banks allow to borrow freely in foreign money markets so that they could equally supply the fund to households and commercial customers. However, the lending interest rates remain unchanged and the banks were allowed to decide the interest on new loan freely. In addition, as the liberalization proceeded, the incentives to borrow remained unchanged, no new general economic policy limit the domestic demand of debt and banking supervision was not tightened.

Subsequently, the Finnish financial system has experienced an extreme expansion. Firstly, the borrowing from Finland bank in local and foreign money market has increased promptly, especially in property purchases and stock market. Due to fierce competition for market shares, the Finnish banks have misjudged the interest rate risks, lowered the bank credit standards and insufficient concern on the value and quality of the borrowers’ collateral. Secondly, interest rate deregulation and tax incentives for households and enterprises has prevailed their demand for loans. In 1988, households and business borrowing from the bank has grown more than 30% (Brunila & Takala, 1993). Thirdly, with the liberalization in the credit market, the national income in Finland rises in between 1986 and 1989 as oil price declines and export prices increase. This is because the freedom of trade resulting the huge increase of international capital inflows, leads to the appreciation of the Finland currency (markka) and contributing to the rises in export prices. The increases in export price and oil shock however do not impede export as the bilateral trade with Soviet Union provide an optimistic trade atmosphere on growth and welfare in Finland. As a result, during the late of 1980s, the credit expansion in Finland has overheated lead to the rate of inflation has increased about 4% and the unemployment rate has decreased to 3% (Bank of Finland).

Finnish banking systems are very large and efficient. In order to attract deposits from aggressive competitions, the banks have invested heavily banking technologies and building large branch networks. However, the extensive resources used have reflected in the operational cost. For the aforementioned reasons, high operating costs incurred has weakened the underlying profit for the bank. In year 1990, the boom in the Finland financial system began to bust. Firstly, central bank in Finland has tightened the monetary policy to control the high rates of credit expansion by increase the short term market rates and imposed higher reserve requirement to deposit banks. Consequently, the Finnish currency (markka) continued appreciating and the lending from deposit bank decelerates promptly which has quickly affected the real estate market as the asset values and profits decline intensely. For example, Skopbank, acts as a central bank for deposit bank is the first bank undergoes serious problems as a result of practice overbearing lending policy in the boom years. Secondly, the collapsed of the Soviet Union in 1991 also contributed to Finland financial crisis. The loss of Soviet Union market has brought an extreme negative impact in term of trade to Finland. For example, the exports and imports to Russia in year 1991 have decreased about 70% which substantially reflected in the decrease of Finland GDP (Honkapohja, Koskela, Leibfritz and Uusitalo, 2009).

In conclusion, the root of the banking crisis in Finland can be traced back to the deregulation of the financial system, outdated banking law and supervision in monitoring the bank and tax system that favored debt financing. Given these facts, Finland’s economy has encountered hasty credit expansion and led to economy overheating.

3.4 Subprime Crisis

Since the year 2006, the number of defaults on subprime mortgages in U.S has increased drastically. It is expected that millions of mortgages will be foreclosed on in 2007 and 2008 when the interest rate for mortgages getting higher (Schwartz, 2007). This issue has become the initial cause of the financial crisis in U.S and thus led to the worst recession since the Great Depression (Crotty, 2009).

As stated above, the subprime mortgage crisis plays vital role in causing the financial meltdown and the world recession in the year 2008. Due to this reason, many studies have been done to determine the reason of failure in subprime mortgage (Schwarcz, 2008). The creations of subprime mortgages in U.S were successfully helped lower credit rating’s borrower to own a house. These borrowers’ incomes were sufficient to cover the monthly interest payments and it helped to boost up the home ownership in the U.S. In between year 2000 and 2005, house prices rose drastically and lead to the increase of the number of subprime borrowers (Lim, 2008). Due to the appreciation of property, borrowers can rent out their house or sell the house with higher price. With all these revenues, they can easily pay off their debt. So, the borrowers start to refinance their mortgages at better property or more property although they cannot afford to pay the interest payment. This is because they expect that the trend of house price appreciation will continue. At that particular time, everyone was earning a profit from the appreciation of the house price. However, the best time was unsustainable (Papadimitriou, Chilcote, and Zezza, 2006). In the mid-2006, the house prices in U.S come to a peak and tapered off and expected to decrease drastically in the year 2007 and 2008 (Lim, 2008). Depreciation of house prices has caused the refinancing to become more difficult. The adjustable rate for subprime mortgages began to reset at higher rates and finally caused higher monthly payment. When interest payment is too expensive, less people could afford to buy a house, so the real estate markets continue to cool down and the house price keeps falling. At the same time, the default and foreclosure rates began to climb. This is because borrowers no longer able to pay their debt as they have to pay too much of mortgages payment. The number of loan defaults even increases as borrowers unable to pay higher loan payment. Thus, the financial crisis happened. U.S. credit and financial markets led to tightening credit around the world and lead to the world recession.

3.5 Ireland Banking Crisis

As mentioned earlier in the overview, the Ireland banking crisis was said to be interrelated with the sovereign debt crisis. Indeed, during the mid to the of 1990s, the economic phenomenon in Ireland had experienced with an outstanding growth which majorly due upon to the construction and housing boom. In fact, the increased in the construction sector and immigration rate had created almost 90,000 new occupations and had attracted over 200,000 foreign workers which had led to the high housing demand (Menendez, 2012). Consequently, the high housing demand had resulted in the higher housing price. Likewise, to ensure that the people continue to demand, mortgage loans were financed through borrowing from international lenders.

However, the property boom since the late 1990s became a bubble when it came to 2002 onwards (European Commission, 2012). The nature of the boom was no longer the same during the 1990s as the labor productivity stopped increasing which eventually affected the whole Irish economy, said, majorly due to the increased unemployment rate, etc. Given this fact, many of the unemployed property owner failed to make payment and default on loans causing the Irish banks lost its ability to repay the lenders. Indirectly, this also affected the Irish government due to the losses taxes.

The tax revenues started to decrease in 2007, as well, the Irish bank was forced to report arrears on their loan books with the international lenders. To cope with these pressures, the Irish government decided to issue a guarantee towards the banks’ liabilities using public funds and the large costs of these measures had stressed further on the budget deficit that had revealed after the collapsed of the housing market. The banking crisis was then declared as the banking sector eventually required assistance from the government due to the inability. However, the banking sector went further devastated as the government debt had increased from 24.4% of GDP in 2007 to 59.4% of GDP in 2009 in which it implied that the Irish government had lost its ability to cover the losses in the banking sector (Menendez, 2012). Given this fact, the investors eventually lost confidence throughout the whole banking sector. For the aforementioned reasons, the banking crisis was the latter effect or said interrelated with the sovereign debt crisis.

4.0 Consequences of Banking Crisis

4.1 Consequences of Great Depression

Great Depression can be classified as one of the major economic crisis in the world history. It has affected every field of life which includes economic, social and cultural effects. Firstly, the depression has led to critical and widespread economic recession both in domestic and international. In 1930s, trade and international commerce collapsed as tax revenues, profits and wages decline drastically. In order to protect sagging economies, every nation raised the tariff on imports, thus led to an intense reduction in world trade especially to the industrialized countries. For example, Britain industrial production reduced 14%, France 29% and German incurred the most reduction in production which is more than 40%. These phenomena show that the world was heading into a global crisis (Rothermond, 1996). In addition, after the stock market crash in 1929, large amount of brokers’ loans was defaulting critically and the value of companies’ stock dropped drastically. Banks and financial institutions became insolvent and led to bank panic. Investors and depositors withdraw their savings from banks to prevent further losses. As a result, many banks in the United States were forced into bankruptcies and companies forced to leave their business. For instances, there are approximately twenty four thousand banks and financial institution in the United States in 1929, however only roughly fourteen thousand remain when the banking holiday began to restore the soundness and confidence of the bank in 1933 (Richardson, 2006). For the aforementioned reasons, the millions of Americans lost their fortunes and jobs. For example, national wages were reduced by 20% and the unemployment rate increased to 25% in year 1933 (Jensen, 1989).

Due to the rising unemployment rate, the consumer spending has decreased drastically, leading to a downturn in business activities. In return, more jobs were cut and incurring in a cycle of contraction. In term and social and cultural effect, great depression has brought an immense increase in crime and suicide rates. Due to the failure of a financial institution and business, unemployment rates rise and led to the drastic drop in nations’ income. This has brought a sudden increase in the crime rate as many unemployed workers forced to theft for food thus thefts, felonies and burglaries have occurred commonly (Johnson, Kantor & Fishback, 2007). The sharp reduction in nations’ income also pushed workers to commit suicides. Meanwhile, infants and old folks have exposed to greater risk of diseases and death during great depression due to the inadequacy of nutrition and medical care (Fishback, Haines & Kantor, 2005). In short, Great depression has not only beaten up the whole financial system in the United States, but also hit the American’s life in the worst way.

4.2 Consequences of Argentina Banking Crisis

Among the consequences that had been resulted from the Argentina banking crisis, one of the critical impacts was the impacts on the social welfare resulted from the incident of destruction or deindustrialization. Foremost, the deindustrialization is referring to the process of reduction in industrial activity, capacity in an economy or a region. Particularly, with the issue of deindustrialization, it had affected the household welfare such as employment, health and education and all these had eventually upturn the social spending. For instance, the unemployment rate of Argentina in the mid of 2001 had raised approaching to 20 percent or more. To indicate more, the unemployment rate had inclined drastically from 20 percent to approximately 40.1 percent in 2002 and most of these individuals were unemployed due upon the freeze on bank assets and the decline of wages (Governance and Social Development Resource Centre, 2009).

Likewise, the budget cut after the banking crisis was one of the significant event that ended affecting the social sector in Argentina, as such, the education in Argentina. In Argentina, the fund that was designed to improve the educational services has been diverted into a fund for short term net programs like school feeding. Given this fact, it has eventually resulted in a teacher strike and has prevented the continuation of the educational reform in Argentina. According to Lewis and Verhoeven (2010), the growth in education spending is relatively more volatile than GDP in which it indicates that education spending has higher sensitivity than on health.

Meanwhile, there was a major impact after the crises in term of health services either in both social health insurance system and the public health system. For instance, there was a dramatic reduction in the social health insurance system, as such, there are approximately 12 percent of the individuals experienced changes in the health insurance services. Within these 12 percent, there are over 60 percent of the individuals from the lowest-income group lost all their coverage and the remaining decided to lower their coverage (Fiszbein, Giovagnoli and Aduriz, 2003). In fact, this had led to the increase in the demand of public health system in which it eventually reduces the funding the for public health facilities.

4.3 Consequences of Finnish Banking Crisis

In 1990s, banks and financial institution in Finland has suffered from the systematic banking crisis. The reasons behind the crisis include deregulation of the financial system, lack of supervision in monitoring bank and a tax system that favored debt financing and outdated banking law. As a result, the economy in Finland as well as the banking system encountered hasty credit expansion which led to the banking crisis.

Skopbank was the first bank encounter failure due to the overbearing lending policy in the boom years. When the banking crisis burst, Skopbank was confronted with a severe shortage of liquidity as huge amount of loan default. Depositors were highly doubtful on Skopbank’s operation whereas the lack of confidence among the money market’s investors also increased. For example, major banks in Finland such as KOP, SYP and OKO Bank refused to purchase Skopbank’s certificates of deposit (Toivanen, 2009). Therefore, in year 1991, the credit liquidity in the bank collapsed. In order to retain confidence and prevent further losses in the Finnish banking system, Bank of Finland decided to step in and took over the control of Skopbank. Bank of Finland has spent more than FIM 16 billion to finance and restructuring the operation of Skopbank. First, the board of the bank was largely replaced followed by established three companies, Scopulus Oy, Solidium Oy and Sponda Oy were established to manage the assets of the bank (Nyberg & Vihriala, 1993).

On the other hand, in the Finnish banking crisis, Finland also suffered from currency crisis in 1992. Prior the banking crisis, Finnish markka was pegged with fixed exchange rate and with the combination of financial deregulation; speculative bubble and inflationary expectations in the stock market and real estate were created. Unfortunately when the banking crisis began in 1990, the central bank has tightened the monetary policy to protect the currency. In return, the crisis had damaged the economy critically and led to the currency crisis. For instance, asset prices decline drastically and firms bankruptcies began to increase in mid of 1991 (Miyagawa & Morita, 2009). Besides, Finland’s capital outflow also increased and led to a lost in reserve in the central bank. Thus, Bank of Finland decided to let the Finnish markka to float and led the exchange rate to fall by about 20% in 1992 (Jonung, Kiander & Vartia, 2008). In conclusion, the injection of fund from the Bank of Finland to the financial system and the depreciation of markka have recovered the Finnish economy rapidly since 1994.

4.4 Consequences of Subprime Crisis

The United States has experienced a subprime mortgage crisis in mid of 2007. The crisis erupted had an immediate contagious to whole economy which includes the cross border capital movement in the United States and Europe, stock market and financial derivative market, real estate market and the entire banking system. Due to the subprime crisis, two way active investment activities between the United States and other countries stopped. These activities include the investment abroad by the U.S and foreign investment in the U.S. For example, in August 2007, French Banking group, BNP Paribus have withdrawn all their affiliated funds that were exposed to U.S subprime mortgage due to the suspend of their assets in a declining price environment (Kacperczky & Schnabi, 2012). Moreover, according to the financial account balance in 2007 to 2009, the demand for foreign financing in U.S has plunged. This implies that the foreign investor have reduced their investment sharply in the U.S. This reduction in investment is due to the contraction in foreign investment in U.S securities. For example, the foreign capital inflows toward the U.S private sector securities have dropped about $100 billion. This reflects that the investor and banks in Europe countries have reduced their investment in U.S structured credit assets, corporate bonds and other private sector financial assets.

Besides, the subprime crisis has also affected the financial sector. First, the stock market and the financial derivative market have collapsed due to the impact of the subprime crisiss (Philips & Yu, 2009). In the beginning of the year 2008, three major stock indices in U.S which include Dow Jones Industrial Average (DJIA), S&P 500 and NASDAQ have entered a bear market. These indices have dropped by their sharpest amounts after the announcement of Lehman Brothers declared bankruptcy and Merrill Lynch joined with Bank of America in a forced merger (Le Vine & Magaldi, 2008). Overall, the DJIA suffered a loss of 7%, NASQAD have decreased about 9.1% and the S&P 500 fells 8.8%. The gradual decline of stock indices in U.S markets has caused the similarly sharp drop in the Asian and European Theses indices have experienced the worst decline in value since the 1987 stock market crash. On the other hand, HSBC has the world largest bank have written down its holding of subprime related investment by US $10.5 billion. It is clear to see that subprime crisis have diminished the excess of cash in the financial market

Moreover, the subprime mortgage crisis in U.S have crush the real estate market. During the subprime crisis period, the numbers of household defaulting on their mortgage contract have been rising to the alarming rate (Hui, 2008). The increasing default rates have threatened the solvency of many largest financial institutions. In order to reduce the impact of default risk toward the solvency, financial institutions have increased their subprime loan interest to cover their lost. Besides, the action ended up will negative consequences. As the mortgage interest increase, household becomes unable to pay the interest rate, so the financial institution has to foreclose the properties and resell it in order to recover the solvency. For instance, in year 2006, 1.2 million household loans were foreclosed and it is expected that 2 million homes will be foreclosed on in year 2007 and even more in 2008 (Schwartz, 2007). However, the mortgage lending is decreasing as the interest increase and household refuse to purchase assets in within the crisis period. When there is an excess supply of homes, and the demand is low, house price will decrease. For example, the sales of new constructed homes have declined 26% in 2007 and forecast to be declining another 15% in 2008 (Kregal, 2008).

Lastly, after the explosion of subprime mortgage crisis, the entire banking system in U.S collapse. In this current crisis, the market based supplies of credit have a more dramatic contraction. The most dramatic fall is in the subprime category follow by the credit supply of other categories, ranging from auto loans, credit card and student loans (Adrian & Hyun, 2009). The losses sustained by major bank have produced a sharp tightening of credit standard and money supply. The banks become extremely careful in managing their capital and decreased the lending activities either to businesses, houses, retail customers or even to each other. For example, the bank loan fell by 68% during the peak of the subprime crisis relative to the peak of credit boom due to the decline of credit supply (Ivashina and Scharfstein, 2010). Since August 2007, the on-going subprime crisis has created serious liquidity issues for the interbank. Many world largest banks such as Citigroup and HSBC banks have written down billions of dollars in the mortgage related investments. In order to contract the resulting lack of liquidity in the interbank market, the Federal Reserve has been proactive in injecting liquidity into the banking system. For example, $765 billion of reserve have injected into over 300 financial institutions in the U.S (Shirai, 2009).

4.5 Consequences of Irish Banking Crisis

Ireland has come across a critical financial crisis indicated by a systematic banking crisis and economic adjustment since 2008. The banking crisis has affected the Irish economies to varying degrees, especially severe in the banking system and real estate market. As aforementioned above, the roots behind the banking crisis has been the overwhelming of boom-bust cycle in the Irish real estate market and the over extension of the domestic bank lending. When the bust cycle arises, drastic decrease in real estate prices and a breakdown in the construction industry has led to the extreme losses in the banking system. In return, banks share prices dropped immensely. Ireland government forced to give a blanket guarantee to the entire depositor and the bondholders. However, the tremendous scale of losses was failed to cover. According to Minister of Finance (2011), the prices of bank recapitalization were estimated at Euro 62.8 billion which is 40.5% of the total GDP of Ireland in 2011. For example, Anglo Irish Bank has incurred largest amount of losses, followed by the Bank of Ireland and Allied.

On the other hand, the collapse of the Irish banking system has crashed the entire economy in Irish. In return, Ireland was forced to join the EU-IMF program in 2010. By then, the Irish government has contributed Euro 17.5 billion to the program from the National Pension Reserve Fund, the European Union has contributed Euro 45 billion whereas IMF has contributed another Euro 22.5 billion to support the banking system and recapitalization. However, the private debt as the result of bank failure were nationalized which enlarge the public’s burden of debt. Darvas (2011) has concluded that other countries will benefit from the Irish banking crisis, but the negative impact of the crisis has transferred to the Irish public debt. For instance, the National Asset Management Agency has established to manage the large proportion of non-performing loans at sizeable discount, but problems arise when the true value of real estate remained unknown as the value residential houses drop by 47% in 2011. As a result, the general public debt in Ireland rocketed from 25% of GDP in 2006 to 107% in 2011 (Clarke & Hardiman, 2012).

Therefore, it can be concluded that the Irish banking crisis was one of the most costly banking crises in Ireland economy’s history (Eoin, 2011).

5.0 Recommendations and Suggestions

As discussed above, at the stage of the crisis, many reports had been written its causes and what the responses should be. In order to prevent future banking crises, there are some recommendations and suggestions could be considered.

5.1 Strengthening Market Forces

The regulators should re-organize the approach and create a system to strengthen the market forces. In order to do so, they are required to identify that additional Pillar 1 capital requirements and supervisory measures such as the greater monitoring of strategic, business models and balance sheets will not attend to the underlying socio-technical causes of the current crisis. After that, we need to ensure all the shareholders and key stakeholders could handle the risk in an effective way. If doing so, it can be eliminated the information asymmetry problems, by creating a culture of accessibility and cleanness of risk management information. After that, we need to recover the capability of process risk management information to the stakeholders, the purpose of doing so is to improve the entire financial services management and ensure that their own supervisors have the required qualitative skills and experience to assess the usefulness of firms’ risk management and governance frameworks (Ashby).

5.2 Regulatory Policy

The regulators shall team up with the global financial service sector to create a new set of standards in line with the Basel capital requirements for the risk management and corporate governance. The regulatory policy must be completed with a set of clear and comprehensive principles and none other than how its function in the long run. All the new standards must be based on the principles and give a freedom to the financial services firm to develop a set of risk management and corporate governance framework that fit with the nature, scale and complexity of the activities. The purpose of giving freedom for setting the framework is to minimize all the compliance cost. Once the frameworks are fit for the organization and definably the rate of compliance would be greater.

For the international policy must be able to reduce the asymmetric information problem. According to Ashby, there is some priority area should be considered such as the disclosure must be widely relevant to the shareholder and easy digests for the non-accountant, greater transparency, risk education improving to the shareholders, and documentary enhancing.

Financial service and risk management typed of education and training should be provided to the boards and senior manager. It helps to manage their organization in an efficient and effective way. It is good that to create a new professional qualification for financial services and risk management. It can improve the entire community have the awareness of risk management and financial services.

Besides that, Angkinand (2009) stated that high coverage of deposit insurance can greatly reduce the probability of the banking crisis as it can prevent financial runs once a crisis occurs. Bank capital requirements and fewer restrictions on bank activities can be implemented to avoid bank institute to involve in a high risk investment and having sufficient fund to turn over when the bank are having financial distress. With these regulations and policies, banks may experience lower loan losses and have resources to lend support to productive investment when banking distress occurs.

5.3 Supervision

Supervision is an important part and it means someone will supervise how the cooperation works. It needs a closer partnership and relationship with the firms to make the supervisory become effective. A standard and firm supervisory standard must be imposed to the supervisors to make an accurate recommendation for the firms. Supervisory should be more focus on the particular firms where consists of high levels of systematic risk, or weaknesses, especially to those firms who breach the standards previously. Some of the supervisors have the authorities to give a "strong recommendation" to a particular firm risk management and governance but the particular firm can choose to reject the recommendation as the firm has gone through a suitable risk acceptance process. A qualitative risk of assessment tools is needed to help the supervisors to access the socio-technical factors such as the structure of the cooperation, risk culture, and the motivation of the management/boards. There are some of the tools are used by others country which is root cause analysis, cause and effect analysis, "What if" analysis, SWOT, Process mapping, Gap analysis, Risk culture analysis and etc.

Supervisors need to be well-trained to select the risk assessment tools. It helps them to make a precise assessment and basically the supervisors are to be chosen based on their industry experiences and the capabilities to make an expert judgment such as board dynamics, management capability, the suitability of risk frameworks and etc. Other than that, there are some of the limitations on each risk assessment tool, so FSA are recommended to get some expert from outside to create a risk assessment tool for themselves.

Besides that, a special recognition can be provided to the those firms whose managed effectively to improve the trust of the public toward the firms which will be also indirectly increase the profit of the firm. In other hand, these recognitions also will encourage other financial firms to be following the rule of supervisor in order to obtain the special recognition from qualified supervisors.

5.4 Strengthening Cooperate Governance

First of all, strengthening governance and control is necessary used to prevent the bank crisis. It is because governance and control are given the former’s systemic significance, capability rapidly to develop and shut down, and a predominantly institutional investor base with no strategic or lasting involvement; and, the presence of safety nets (Liikanen, 2012).

Corporate governance needs to be strengthened. It should strengthen in the boards and management; advance the risk management function; rein in compensation; facilitate market monitoring; and, strengthen enforcement by competent authorities. In order to strengthen the boards and management, more attention is needed on the governance and control mechanisms of all banks, especially in the large and complex bank. They are requiring more attention as the transaction is difficult to manage and its impact is big. The management and boards must be evaluated through some fit and proper tests.

Next, the risk management function within all banks, in an attempt to strengthen the control mechanism within the group and to create a risk culture at all levels of financial institutions, legislators and supervisors should fully implement the CRD III and CRD IV proposals. In this stage must concern about the risk analyzing part as the management team might misunderstand or misinterpret the risk, it will cause a big trouble to that particular company. The problem occurs most probably caused by "compounded decision" by a team. In addition, reforming the banks’ remuneration schemes could be the most important step to re-establish the trust between the public and banker, so that they are proportionate to long-term sustainable performance.

Public disclosure is a way to get back the investors’ confidence and increase the market discipline, this disclosure should include all the relevant information, financial statement and reports for each legal entity and main business lines. The purpose of doing so is to give a full understanding to the public for its company situation. An effective enforcement, supervisors should have effective authorities to enforce risk management responsibilities, including sanctions against the executives concerned, such as lifetime professional ban and claw-back on deferred compensation. (Liikanen, 2012)

6.0 Conclusion

As noted above, banking crisis can be defined as disruptive events that consist of financial crises, bank panics, bank failures and confusion about the financial system which have immense effect on a country’s financial system and economy as a whole. Based on the study of banking crises, there is a complex interaction between banks and the economy. For instance, macroeconomic factor such as the growth of GDP, inflation rate, credit growth, exchange rate and term of trade are determinants of bank crises. Besides, a country monetary policy, supervision of the banking system and banking law, other crises such as currency crisis or sovereign debt crises also contributed to the occurrence of bank crises.

Over the decades, banking crises appear commonly in the world. Great depression was the longest and severest economic recession in the history of economic followed by the Finland banking crisis, Argentina banking crisis, Asian Financial crisis, Subprime crisis and Ireland banking crisis. These crises occurred in different decades and countries but brought an immense impact to the country’s economic, political, social and cultural. For instance, in the banking crises, huge amount of business and bank bankruptcies, unemployment rates increase drastically, inflation rates rises, as well as crime and commit suicide rate

In conclusion, many reports regarding the roots and solutions had been written by economists and researchers to prevent the future banking crises. In conclusion, historical experience already shows that banks and financial institution play a vital in the occurrences of banking and financial crises. In order to prevent future banking crises suggestions such as strengthening the market forces, standard and regulatory policy, fair supervision on financial institutions and banks and strengthening the corporate governance are important.