Working Paper Series
Origins and Resolution of Financial Crises; Lessons from the Current and Northern European Crises
(), Lars Oxelheim
() and Clas Wihlborg
Abstract: Since July 2007 the world economy has experienced a severe
financial crisis originating in the U.S. housing market. The crisis has
subsequently spread to the financial sectors in European and Asian
economies and led to a severe worldwide recession. The existing literature
on financial crises rarely distinguish between factors that create the
original strain on the financial sector and factors that explain why these
strains lead to system-wide contagion and a possible credit crunch. Most of
the literature on financial crises refers to factors that cause an original
disruption in the financial system. We argue that a financial crisis with
its contagion within the system is caused by failures of legal, regulatory
and political institutions.
One policy implication of our view is that
the need for various forms of rescues of financial firms in times of crises
would be reduced if appropriate institutions could be put in place Lacking
appropriate institutions to avoid contagion within the financial system and
a potential credit crunch, ad hoc financial crisis management is required.
We draw on experiences from the financial crises in the Nordic countries at
the end of the 1980s and the beginning of the 1990s. In particular, the
Swedish model for crisis resolution, which has received attention during
the current crisis, is discussed in order to illustrate the problems policy
makers face in a financial crisis without appropriate institutions. Current
European Union approaches to the crisis are discussed before turning to
policy implications from an emerging market perspective in the current
Keywords: Financial Crisis; Institutional Failure; Insolvency Procedures; Contagion; Systemic Effects; Macroeconomic Shock; Financial Crisis Management; Swedish Model; (follow links to similar papers)
JEL-Codes: D53; E44; E58; F32; F42; F55; G15; G18; G21; G28; (follow links to similar papers)
48 pages, May 20, 2009
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- This paper is forthcoming as:
Ostrup, Finn, Lars Oxelheim and Clas Wihlborg, 'Origins and Resolution of Financial Crises; Lessons from the Current and Northern European Crises', Asian Economic Papers.
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