Currency and Banking Crises: The Origins and How to Identify Them

Currency and banking crises have occurred periodically. Along with the growing integration and liberalisation of financial markets, there is an increasing number of currency and banking crises. This chapter shows that crises can occur in any good or bad economic conditions as they can be triggered by rational actions, panics or contagion effects. As the crises stem from various aspects, thus, they should be mitigated with different policies. Furthermore, this chapter discusses the exchange market pressure index to identify a currency crisis, the money market pressure index to identify a banking crisis and the financial market pressure index to identify the overall financial crises. Once the crises are identified, economists can start to investigate the determinants of the crises. While the probit/logit models are arguably the most popular approaches to investigating the determinants of crises, they fail to provide useful forecasts. On the other hand, while the signalling approach is considered the most successful method to forecast crises, the results are difficult to be interpreted. The empirical studies suggest that the currency and banking crises are typically preceded by a real appreciation and a lending boom, the signs of a boom period in the business cycle.