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Causes of Financial Crises (Financial Economics)

AS, A-Level, IB
AQA, Edexcel, OCR, IB, Eduqas, WJEC

Last updated 21 Mar 2021

This is a recording of a revision webinar exploring some of the causes of financial crises in developed and emerging market countries.

There are many different types of crises ranging from currency/external debt crises to disturbances in banking systems. There is rarely a single cause of a crisis, most are the result of a combination of complex factors involving a range of market, policy and regulatory failures.

Revision Webinar: Causes of Financial Crises

Summary of key causes

Financial market failures

  • Irrational exuberance among agents (Shiller)
  • Increased complexity arising from financial innovation
  • Minsky hypothesis – stability breeds instability

Policy failures

  • Unintended consequences of financial deregulation
  • Banks too big to fail? Risky behaviour due to moral hazard?
  • Interest rates too low for too long (e.g. USA, EZ 2002-2007)
  • Large models of the economy which assume agents (businesses and consumers) always behave rationally
  • Failures of ratings agencies in pricing risk accurately

Structural changes in the global economy

  • Economic imbalances including global savings glut and low real interest rates
  • Media and modern communications – immediate feedback

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