The Bankwatch

Tracking the consumer evolution of financial services

The Aftermath of Financial Crises | study

A short and useful paper offerring some points that help to frame the next few years for strategic planning purposes.  This to be read of course in the context of politicians preaching ‘road to recovery’ which leaves the uninformed with the view that we will get over this blip and back to normal.

I prefer to think of this as a shift that will profoundly change things for the next few years, with some good and some not so good elements in that shift.  It may be good that the banking industry will be shaken up, and out of that some innovation and better services will appear.  The less good part is that more bank customers will have to work harder and longer for less money, and accumulation of wealth will return to a savings culture rather than an asset accumulation one.

All this provides a different prospect for financial services, and products will need to be restructured or invented to match those busier, poorer customers who nonetheless have financial goals such as debt reduction and wealth accumulation for retirement.

The paper outlines three core results of financial crises.  This is based on empirical evidence of 18 post war crises in the developed world, including “the big five” (Spain 1977, Norway 1987, Finland, 1991, Sweden, 1991, and Japan, 1992) along with some developing country crises (the 1997–1998
Asian crisis, Colombia 1998; and Argentina 2001.

No real surprises here;  Low asset values, high unemployment, and high government debt.  Click through for details (13 pages).

The Aftermath of Financial Crises pdf – Reinhart (Univ of Maryland), and Rogoff (Harvard)

First, asset market collapses are deep and prolonged. Real housing price  declines average 35 percent stretched out over six years, while equity price collapses average 55 percent over a downturn of about three and a half years.

Second, the aftermath of banking crises is associated with profound declines in output and employment. The unemployment rate rises an average of 7 percentage points over the down phase of the cycle, which lasts on average over four years. Output falls (from peak to trough) an average of over 9 percent, although the duration of the downturn, averaging roughly two years, is considerably shorter than for unemployment.

Third, the real value of government debt tends to explode, rising an average of 86 percent in the major post–World War II episodes.

Interestingly, the main cause of debt explosions is not the widely cited costs of bailing out and recapitalizing the banking system. Admittedly, bailout costs are difficult to measure, and there is considerable divergence among estimates from competing studies. But even upper-bound estimates pale next to actual measured rises in public debt. In fact, the big drivers of debt increases are the inevitable collapse in tax revenues that governments suffer in the wake of deep and prolonged output contractions, as well as often ambitious countercyclical fiscal policies aimed at mitigating the downturn.

Written by Colin Henderson

May 25, 2009 at 09:44

%d bloggers like this: