Charting Banking XIX: History of Financial Crises

Includes: KBE, KRE
by: PlanMaestro

Via Barry Ritholtz we get precisely the information we were looking for: how recurrent are financial crisis. I only have one question: where is the Latin American debt crisis in this chart? OK, American banks suffered and their stress appears just there at the beginning of the 80s, but where are Mexico, Argentina, Brazil, Chile, Bolivia, etc.? At least it does not change the point that these crises are very frequent.

FSI: Financial Stress Index; Source: IMF Direct

This point is very much related to Martin Wolf’s question: must large capital inflows always end in crisis?

Capital inflows can distort loans to deposits ratios and end in underwriting terrible loans. And every time the banking system is compromised there are consequences. The excellent book by Kenneth Rogoff and Carmen Reinhart shows how pervasive are these occurrences.

I am not an economist and will not dare to attempt to answer Martin Wolf’s question. However, as an investor I wonder:

  • Given that not even a sophisticated American financial system managed to isolate the banks from these inflows, what chances do other countries have of avoiding a financial crisis?
  • Given how recurrent are these episodes, is not there a possibility of waiting for the next episode, profiting from it, moving then to safe investments, and waiting for the next crisis?