Throughout 140 years of financial history, common traits of systemic banking crises include being preceded by marked expansions of financial intermediaries' balance sheets (credit booms gone bust) and remaining costly for the real economy despite active central bank policies. While increases in public debt after banking crises are not new, there are indications that these costs have risen over time. Recessions associated with financial crises are generally deeper and more costly than normal recessions.
More recently, distinct characteristics of financial crises have emerged. These include the financial system's increased dependence on wholesale funding markets, the close link between crises and global imbalances, and unprecedented reserve accumulation. Additionally, the global credit boom since the late 1970s did not consistently lead to higher investment rates, raising questions about the economic benefits of increased financial intensity.
Historical data further show that credit growth is the most reliable predictor of impending financial instability, although the correlation between lending booms and current account imbalances has strengthened significantly in recent decades. The fiscal costs of systemic banking crises vary, with a median cost of 6.7% of GDP for high-income countries and 10% of GDP for low and middle-income countries. After subtracting recoveries, these net fiscal costs are 3.3% of GDP and 9.6% of GDP, respectively. Public debt also sees significant increases, with a median rise of 21.1% of GDP in high-income countries and 16.4% of GDP in low and middle-income countries over a four-year period surrounding the crisis.
