Gorton, G. (2018), Financial Crises is a survey article. I thought its explanation of banking and financial crises as information shocks was enlightening.
Banking and financial crises as information shocks
Money, or bank notes, (or similar on-demand debt liabilities of a bank,) need to be information-insensitive (thus, interchangeable: $1 at Bank A == $1 at Bank B) to facilitate exchange. Otherwise, uninformed agents (any non banking-professionals) face adverse selection, haircuts on bank debts they hold, and thus withdraw from banking-facilitated commerce.
Banking crises are triggered by common-knowledge information releases (eg. news broadcast) that are unexpectedly bad (actual news worse than forecast by more than a threshold) (cites Gorton, 1988), which make “money at those particular banks” information-sensitive ($1 at those particular banks might not be worth $1).
Financial crises are slightly more general: debt liabilities of companies in general go from being information-insensitive (interchangeable: usable as general collateral, with holders indifferent between different companies’ debt) to information-sensitive (particular companies’ debt might not be worth face value)
Banking crises
Frequency:
147 banking crises in 1970–2011 (cites Laeven & Valencia, 2012)
Business cycle peaks and credit booms are only loosely linked to banking crises:
Only about 30% of banking crises were preceded by a credit boom (cites Laeven & Valencia, 2012)
Most credit booms are not followed by a banking crisis (cites Gorton & Ordonez, 2018)
Good booms (not followed by a banking crisis): Positive and lasting shock to Total Factor Productivity (TFP) and Labour Productivity (LP)
Bad booms (followed by a banking crisis): Positive but transient shock to TFP and LP
Gorton, G. (2018), Financial Crises is a survey article. I thought its explanation of banking and financial crises as information shocks was enlightening.
via: New York Fed (2024). Tracing Bank Runs in Real Time
via: Twitter: Patrick McKenzie
Banking and financial crises as information shocks
Money, or bank notes, (or similar on-demand debt liabilities of a bank,) need to be information-insensitive (thus, interchangeable: $1 at Bank A == $1 at Bank B) to facilitate exchange. Otherwise, uninformed agents (any non banking-professionals) face adverse selection, haircuts on bank debts they hold, and thus withdraw from banking-facilitated commerce.
Banking crises are triggered by common-knowledge information releases (eg. news broadcast) that are unexpectedly bad (actual news worse than forecast by more than a threshold) (cites Gorton, 1988), which make “money at those particular banks” information-sensitive ($1 at those particular banks might not be worth $1).
Financial crises are slightly more general: debt liabilities of companies in general go from being information-insensitive (interchangeable: usable as general collateral, with holders indifferent between different companies’ debt) to information-sensitive (particular companies’ debt might not be worth face value)
Banking crises
Frequency:
147 banking crises in 1970–2011 (cites Laeven & Valencia, 2012)
Business cycle peaks and credit booms are only loosely linked to banking crises:
Only about 30% of banking crises were preceded by a credit boom (cites Laeven & Valencia, 2012)
Most credit booms are not followed by a banking crisis (cites Gorton & Ordonez, 2018)
Good booms (not followed by a banking crisis): Positive and lasting shock to Total Factor Productivity (TFP) and Labour Productivity (LP)
Bad booms (followed by a banking crisis): Positive but transient shock to TFP and LP