Financial Crises, Regulation and Growth

The paper discusses the possibility of a systemic banking crisis as a result of debt defaults, putting this risk and its impact on the economy into recent historical context. It looks at the vulnerability of the personal and business sectors to increases in borrowing rates, and at the evidence for a risk related rise in borrowing rates. There is an investigation of the impacts from a significant rise in the spread between lending and borrowing rates for both producers and consumers. Such an increase in spreads might arise when banks wish to rebuild their capital after a crisis or reflect significant credit rationing. In either case they represent the immediate impacts of a crisis in the banking sector. It also investigates the impact on output of a permanent, regulation induced, rise in margins in the financial sector, taking into account the impacts of regulation on equity market valuations and on country specific risk premia.