Financialisation, financial instability and financial crises

Financial crises occur more frequently in the presence of a big and unregulated financial sector, which is the essence of financialisation. Financial instability causes instability in the real economy via several channels, including funding costs, credit availability, corporate net worth, household net worth, exchange rates, confidence, and risk aversion. Financial crises tend to make consequent recessions more severe than a recession that is not associated with a financial crisis, which means that the recessions produced by financial crises are deeper and longer than otherwise. The underlying mechanism works as follows: financialisation causes financial instability, leading to financial crises and consequently to economic instability. Macroeconomic and financial stability are interconnected to the extent that the term “financial stability” is sometimes understood to cover macroeconomic stability, and vice versa.