A Balance Sheet Approach to Financial Crisis
International Monetary Fund, Dec 1, 2002 - Business & Economics - 63 pages
The paper lays out an analytical framework for understanding crises in emerging markets based on examination of stock variables in the aggregate balance sheet of a country and the balance sheets of its main sectors (assets and liabilities). It focuses on the risks created by maturity, currency, and capital structure mismatches. This framework draws attention to the vulnerabilities created by debts among residents, particularly those denominated in foreign currency, and it helps to explain how problems in one sector can spill over into other sectors, eventually triggering an external balance of payments crisis. The paper also discusses the potential of macroeconomic policies and official intervention to mitigate the cost of such a crisis.
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adjustment aggregate balance sheet assess assets and liabilities balance of payments balance sheet analysis balance sheet approach balance sheet effects balance sheet problems bank run banking system billion borrowing capital account crises capital structure claims commercial banks country’s aggregate country’s balance sheet creditors currency denominated debt currency mismatch currency risk current account debt restructuring demand for foreign deposits difficulties domestic currency emerging market economies example exchange rate regime external debt external financing external official financing financial crises financial institutions financial sector financing gap financing needs fiscal flows foreign assets foreign currency debt foreign currency denominated foreign currency liquidity foreign exchange Fund’s government sector government’s hard currency increase interest rates International Investment Position International Monetary Fund investors macroeconomic maturity and currency maturity mismatch monetary authorities nonbank sector nonresidents Nouriel Roubini official lending official sector real depreciation reserves residents sectoral balance sheets solvency risk sustainability Thailand U.S. dollars