Post-socialist Bank Crises and the Problems of Institution-building

Bank crises are usually the result of dramatic swings in the value of assets held by the banking system. When asset values fall relative to liabilities, banks net worth is eroded, resulting in crisis. Minsky (1977) argues that such asset devaluations are a normal feature of the business cycle in market economies. As confidence builds during the business cycle, more and more agents engage in speculative finance, creating an increasingly fragile financial structure. Adverse movements in interest rates at the top of the business cycle can make these positions untenable, leading to financial crisis. Kindleburger (1978), in his historical retrospective on financial crises, emphasizes the role of shifts in confidence at the peak of the cycle. Financial crisis, he contends, is precipitated by a self-fulfilling perception that the market has hit its peak.