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An analysis of the causes of recent banking crises

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  • David T. Llewellyn

Abstract

The incidence of systemic banking crises has risen over the past twenty years and the costs have been high. Although each country's experience has country-specific factors, several common elements appear in most crisis countries: (1) volatility in the macro economy; (2) the inheritance of structural weaknesses in the economy and financial system; (3) hazardous banking practices; (4) hazardous incentive structures and moral hazard within the financial system; (5) ineffective regulation; (6) weak monitoring and supervision by official agencies; (7) the absence of effective market discipline on banks, and (8) structurally unsound corporate governance mechanisms within banks and their borrowing customers. Causes of such crises are complex and a myopic focus on single factors (e. g. instability in the macro economy, weak regulation, etc.) misses the essential feature of interrelated and multidimensional causal factors. Although macro-instability has been a common feature, and may often have been the proximate cause, banking crises usually emerge because instability in the economy reveals existing weaknesses within the banking system.

Suggested Citation

  • David T. Llewellyn, 2002. "An analysis of the causes of recent banking crises," The European Journal of Finance, Taylor & Francis Journals, vol. 8(2), pages 152-175, June.
  • Handle: RePEc:taf:eurjfi:v:8:y:2002:i:2:p:152-175
    DOI: 10.1080/13518470110071182
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    References listed on IDEAS

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