We extend the growth-at-risk (GaR) literature by examining US growth risks over 130 years using a time-varying parameter stochastic volatility regression model. This model effectively captures the distribution of GDP growth over long samples, accommodating changing relationships across variables and structural breaks. Our analysis offers several key insights for policymakers. We identify significant temporal variation in both the level and determinants of GaR. The stability of upside risks to GDP growth, as seen in previous research, is largely confined to the Great Moderation period, with a more balanced risk distribution prior to the 1970s. Additionally, the distribution of GDP growth has narrowed significantly since the end of the Bretton Woods system. Financial stress is consistently associated with higher downside risks, without affecting upside risks. Moreover, indicators such as credit growth and house prices influence both downside and upside risks during economic booms. Our findings also contribute to the financial cycle literature by providing a comprehensive view of the drivers and risks associated with economic booms and recessions over time.

Modern financial crises are difficult to explain because they do not always involve bank runs, or the bank runs occur late. For this reason, the first year of the Great Depression, 1930, has remained a puzzle. Industrial production dropped by 20.8 percent despite no nationwide bank run. Using cross-sectional variation in external finance dependence, we demonstrate that banks’ decision to not use the discount window and instead cut back lending and invest in safe assets can account for the majority of this decline. In effect, the banks ran on themselves before the crisis became evident.

Global financial crises and potential sovereign defaults provide an opportunity for financial regulators and analysts to revise assumptions in their risk models. These conditions are also an opportunity for regulators and analysts to distinguish the ‘hyper-real’ economy, represented by derivatives, from the real economy, which requires assessment through an analysis of human as well as financial capital. Regulators are required to demonstrate that they are skilled in conducting the most thorough analysis of all elements of the finance system in order to help the investing public to manage risk as much as possible. The contribution of this article is to overview the limitations inherent in regulators’ traditional focus on financial analysis, as well as in financial analysts’ failure to consider the relevance of people management data when evaluating the potential performance of knowledge-intensive, service-based organisations. The article argues for a stronger focus on analysis of non-financial capital, including human capital, to provide a more effective ‘early warning’ of potential financial distress.

Far from being an event of a decade ago, the 2008 global financial crisis is a manifestation of an ongoing crisis of the world order, with social, political and ecological dimensions that cannot be seen separately from each other. The root cause of the crisis can be traced back to the collapse of the Bretton Woods System in August 1971, and the failure to design an equitable and inclusive global financial and economic governance architecture consistent with the changed global economic realities. The vacuum was quickly taken up by the neoliberal orthodoxy that pushed the agenda of wholesale liberalisation, resulting in unprecedented domination of speculative finance capital and multinational corporation–led globalisation. This has seen falling share of wages in national income, growing wealth concentration, rising income inequality and ballooning of household debts. The consequence was frequent and increasingly deeper and wider financial crises.

The power of finance ensured that, other than for an initial fiscal push to salvage financial institutions, monetary measures in the form of quantitative easing, involving the infusion of large volumes of cheap liquidity, were the principal response to the 2008 global financial crisis. The effects of the generalised and prolonged dependence on such measures have been a substantial increase in vulnerability, at the centre of which is a huge build-up of private – especially corporate – debt, and unwarranted and unsustainable asset price inflation in both developed country and ‘emerging economy’ markets. A consequence of these processes is a massive increase in income and wealth inequality across the world, which limits the level of effective demand and growth.

Irresponsible lending practices on the part of financial institutions and proliferation of tradable derivatives were key causal agents of the 2008 financial crisis. However, it is less clear why, historically, loose credit arrangements were so widespread. Somewhat misleadingly, much conjecture has laid blame at the feet of financial institutions themselves. While it is true that duplicitous and even corrupt lending practices were consequential antecedents of the crisis, a legacy commitment to certain – laudable – elements of New-Dealism created context for these elements to become established. To understand really what went wrong, it is necessary to look back before the 2000s and appreciate the interaction that was occurring between a long-term policy commitment to neoliberalism and piecemeal/fragmented application of approaches that aimed to assist financially disadvantaged people. Using the analogy of heart-attack pathology to guide some of its analysis, this essay argues for better policy-integration.

We propose an easy to implement yield curve extrapolation method to determine long-term interest rates suitable for regulatory valuation. We empirically evaluate this approach for the German nominal bond market, by estimating the model on bonds with maturities up to 20 years and assessing the out-of-sample performance for bonds with maturities beyond 20 years. Even though observed long-term yields are somewhat lower than the predicted yields, the method performs quite well empirically given its simplicity. We perform a case study on pension fund liability valuation and show that our proposed method would have a substantial impact on liability values.

The Swiss financial centre, as it developed during the twentieth century, has for a long time been presented and perceived as a singularly stable and solid environment escaping crises and restructuring. This view, promoted by the dominant actors – private banks, cantonal banks and large commercial banks – presenting their own development, in a teleological vision, as success stories, is strongly challenged by more recent research developments. Our article deals with the evolution of banking demography in Switzerland between 1850 and 2000 and examines the exits of banking institutions from the statistics, identifying six periods of crisis and restructuring. The article proposes a new statistical series that makes it possible to scrutinise with a high level of granularity the banks that fail or are taken over, in particular by observing their category of bank and, for the period 1934–99, their size. It uses historical banking demography as a gateway to understand more broadly the phases of transformation of the financial centre. In doing so, this contribution questions the gap between the existence of significant phases of banking instability, their low importance in collective memory, and the perception of the Swiss banking sector as a model of stability. It also helps to refine our understanding of the evolution of the Swiss financial centre in general.

We have produced a series on the Bank of England's profits from its foundation in 1694 to the present time. This has not been available before. We explain the path of these profits over more than 300 years and account for their changing pattern. We next examine from where the profits derived, first in ‘normal times’, and then seeking, in particular, the impact of wars and financial crises. Other questions are: how much derived from seignorage; to what extent were profits passively acquired? Finally, we examine what the distribution regime was, and if, and how, that changed. This becomes more interesting in the period after nationalisation with some surprising results.

The deleterious effect of debt restructuring on banks’ balance sheets and, consequently, on the economy as a whole has been a key policy issue. This paper studies how post-default fiscal policy interacts with this sovereign-bank loop and shape the response of a model economy. Calibration of the model matches characteristics of the Greek economy at the time of the bond exchange. Debt restructuring in place of higher lump-sum taxation or lower nonproductive government spending harms the economy even if no other cost of default is considered. However, the sovereign-debt loop is less costly to the economy than increases in labor or capital taxes to service debt. Even so, if fiscal policy is too responsive, a crowding-out effect inhibits the recovery of capital markets, hence a more conservative fiscal stance is desirable. Thus, how diabolic the post-default sovereign-bank loop is depends to a large extent on the way fiscal policy responds.

This paper provides a new index of money market and bank lending interest rates in Spain for 1900–1935. New archival evidence reveals a structural change in market interest rates vis-à-vis the official rates charged by the Banco de España (BdE). Before 1914, the BdE rate operated as a ceiling to market rates. The outbreak of the First World War caused market rates to soar and the BdE rate started operating as a floor, as bank liquidity started depending on the BdE. This was accompanied by new banking legislation introduced in 1921, which changed the collateral framework through which the BdE lent to banks. The resulting interest rate index illustrates the persistent impact of financial deglobalisation caused by the outbreak of the War.

Policymakers need to know if the structure of competition and the degree of banking market concentration change the incidence of financial crises. Previous studies have not always come to clear conclusions. We use a new dataset of 19 countries where we include capital adequacy and house price growth as factors affecting crisis incidence, and we find a positive role for bank concentration in reducing incidence. In addition, we look at New Industrial Economics indicators of market structure and find that increased market power also reduces crisis incidence. We conclude that attempts to increase competition in banking, although welcome for welfare reasons, should be accompanied by increases in capital standards.

This paper analyses the mechanisms through which capital flows produced financial instability in Spain over a 165-year period. We study why and how capital bonanzas make crises more likely and severe, and whether their incidence varies depending on types of crises (currency, banking and debt crises). We conclude that most of them occurred in different monetary policy regimes, but they were associated with capital bonanzas in a liberal regulatory framework, both of which contributed to a higher likelihood and greater severity of crises. The analysis of the different monetary policy regimes, financial structures and the types of crises allows us to draw some policy implications that emphasise the need for sound financial regulation and supervision.

This article explores the economic issues related to financial crises at insurance companies, using an example from the Great Depression, the National Surety Company. National Surety was a large and diverse American insurance company that experienced a major crisis in 1933 due to losses from its guarantees of mortgage-backed securities. I find that policyholders were able to stage a massive run on the company by demanding the return of their unearned premiums. A key dynamic of the crisis was that policyholders at an insurance company have a dual role as holders of liabilities and as providers of income. In addition, I establish that government officials believed National Surety to be systemically important, due to the size of its insurance business and because many of its counterparties were societal actors that these officials sought to protect. As a result, the New York State Insurance Commissioner used emergency powers to reorganize the company, with the goal of providing continuity to its business lines outside mortgage-backed security insurance.

Using individual balance sheet data from the state banks in one state that was deeply impacted by the 1893 crisis, this article presents evidence that correspondent networks played an important role in transmitting the crisis. In particular, the unexpected closure of a single large national bank in Kansas City considerably increased the probability of suspension among the state banks that were connected to it through the correspondent networks. This episode thus illustrates how contagion can spread through interbank networks and sheds new light on the nature of the 1893 crisis.

The 1976/1977 crisis was the most severe in Spanish history, but the losses associated with the 2008 crisis are huge. This paper compares these two great banking crises and identifies the main parallels and differences between them. Is the current crisis as severe as that of 1976? What is the impact on the banking and financial sectors? We show that the 1976 crisis is being surpassed by the 2008 crisis in terms of the decline in GDP, industrial production and unemployment, and that these two events have had at least a similar impact in terms of output gap and output loss. Finally, the financial impact measured by different financial indicators confirms the greater severity of the 2008 crisis.

This article analyzes sovereign debt defaults in four Latin American countries—Argentina, Brazil, Chile and Mexico—for the period 1870-2012. The impact of sovereign defaults on real GDP growth is generally short-lived, while the impact in terms of output losses is deep and lasts long. Defaults in the period 1972-2012 show a deep and long-lasting impact compared to defaults in earlier periods. Moreover, the length of the contraction that follows a default is associated with favourable international conditions in the run-up to a default, while the depth of the contraction is associated with an expansive domestic economy in the run-up to a default. The results fit with boom–bust theories and sudden stop models.

The occurrence and unpredictability of speculative bubbles on financial markets, and their accompanying crashes, have confounded economists and economic historians worldwide. We examine the ability of the log-periodic power law model (LPPL-model) to accurately predict the end dates of speculative bubbles on financial markets through modeling of asset price dynamics on a selection of historical bubbles. The method is based on a nonlinear least squares estimation that yields predictions of when the bubble will change regime. Previous studies have only presented results where the predictions turn out to be successful. This study is the first to highlight both the potential and the limitations of the LPPL-model. We find evidence that supports the characteristic patterns as proposed by the LPPL-framework leading up to the change in regime; asset prices during bubble periods seem to oscillate around a faster-than-exponential growth. In most cases the estimation yields accurate predictions, although we conclude that the predictions are quite dependent on the point in time at which they are conducted. We also find that the end of a speculative bubble seems to be influenced by both endogenous speculative growth and exogenous factors. For this reason we propose a new way of interpreting the predictions of the model, where the end dates should be interpreted as the start of a time period where the asset prices are especially sensitive to exogenous events. We propose that negative news during this time period results in a regime shift and the bursting of the bubble. Thus, the model has the ability to predict sensitivity to exogenous events ex ante.

This paper examines whether EU membership enhances or diminishes the UK's financial sector stability, and therefore its prominence in global finance. The UK is host to the largest share of financial services in the EU, despite being outside of the Eurozone. An important reason is that, as a member of the EU, the UK has direct access to the Eurozone's financial infrastructure. If the UK leaves the EU (and EEA) banks and other financial services firms may continue to have access to the Single Market, but they are unlikely to have direct access to the Eurozone's infrastructure. Banks in the UK will no longer be direct members the Eurozone's payments system. The swap arrangement between the European Central Bank and Bank of England would have no legal enforcement mechanism. Resolution of cross-border banks would be more challenging with less incentive for a cooperative outcome. While some may welcome the reduced size of the financial system, not without reason, this could be achieved more effectively with domestic regulation than by leaving the EU. Given the uncertainty that would follow a vote to leave, there is a risk of capital flight.

In 1878 Chile experienced a banking crisis which brought an end to the Chilean free-banking period based on convertibility initiated in 1860. Using monthly bank balance sheets and other primary sources, I analyze the period and argue that one important explanation for the crisis was the growing relationship between banks and government through state loans to finance fiscal deficits and privileges to the issuing banks. I claim that the crisis emerged from a large bank loan in late 1877 which induced over-issuance and depreciation expectations leading, logically, to a bank run. The Chilean case provides valuable evidence of an element frequently neglected by the free-banking literature: the links between banks and government.