Chronology of episodes of systemic financial stress in Europe
Summary:
· An episode of systemic financial stress combines high stress on financial markets with a prolonged and substantial negative impact on the real economy.
· Since 1964, around 50% of recessions in Europe have been classified as episodes of systemic financial stress.
· Recessions last on average 6 months longer, and the decline in GDP is on average 3 percentage points greater, when crises are associated with an episode of high financial stress.
How can a systemic financial crisis be identified? What are the characteristics of such a crisis compared to episodes of conventional recession? How did systemic financial crises spread between European countries? These questions have been of paramount importance since 2008. Indeed, national and international regulators are seeking to reduce the likelihood of such events, which must therefore be identified. Even when they do occur, these crises, which combine stress in the real economy and stress in the financial markets, are not always unanimously identified by experts, who apply different, sometimes subjective, criteria.
The article by Duprey et al. (2016) provides a transparent and objective analytical framework for identifying episodes of systemic financial stress in Europe. The approach is intended to complement surveys of experts in order to construct a chronology of financial crises in Europe.
How can a systemic financial crisis be identified?
The article by Duprey et al. (2016) constructs a financial stress index for each European country since 1964 at the earliest. Episodes of high financial stress are then identified using the same methodology as that generally used to identify recessions (regime-switching model). Finally, among the episodes of high financial stress, those characterized by a simultaneous, persistent, and sufficiently severe deterioration of the real economy are identified.
What are the characteristics of episodes of systemic financial stress compared to episodes of conventional recessions?
Approximately 50% of recessions in Europe since 1964 are classified as episodes of systemic financial stress, i.e., combining high stress on financial markets with a prolonged and substantial negative impact on the real economy. Episodes of systemic financial stress have three main characteristics:
1. Recessions last on average six months longer when they are associated with an episode of high financial stress.
2. The decline in GDP is on average 3 percentage points higher when the recession is associated with an episode of high financial stress.
3. Episodes of systemic financial stress generally affect several countries simultaneously. The number of countries simultaneously facing systemic financial stress in 2008 was matched only by the first oil shock in 1973.
How did systemic financial crises spread among European countries?
The chronology of episodes of systemic financial stress is consistent with those established by experts in Europe. Between 90% and 100% of episodes commonly identified as banking crises are thus identified as episodes of systemic financial stress. The graph below lists the 68 episodes of systemic financial stress in Europe.
Chronology of episodes of systemic financial stress and intensity of stress on the real economy for EU countries.
Note : periods without sufficient data are shown in gray.
Reference:
A more detailed summary in English is available here. The most recent version of the article in English is available here (Table B.5. on page 37 lists episodes of systemic financial stress). The most recent crisis dates, financial stress indices, and other data are available here.
Duprey, T., B. Klaus, and T. Peltonen (2015),“Dating Systemic Financial Stress Episodes in the EU Countries,”European Central Bank Working Paper No. 1873.
