Quantitative Risk Management: A Practical Guide to Financial Risk, + Website

4.3 Systemic Financial Events

When we move from idiosyncratic to systemic financial events, we move from small potatoes to real money. Although idiosyncratic losses may be measured in hundreds of millions of dollars, systemic losses are measured in hundreds of billions.

Systemic financial events come in a variety of forms: hyperinflation and currency crashes, government debt default or restructuring, and banking crises. This section touches only the surface. A wide literature covers the topic: Mackay (1932), originally published in 1841, provides an entertaining look at the South Sea Bubble in England, the Mississippi scheme in France, and the tulip mania in Holland. Kindleberger (1989) is a classic work on asset manias and crashes, and Reinhart and Rogoff (2009) is a comprehensive and instructive compendium of financial crises across 800 years and more than 60 countries.

Table 4.5 shows what Reinhart and Rogoff call the “big five” crises in advanced countries from World War II through mid-2000 (that is, before the Great Recession of 2008–2009). Reinhart and Rogoff briefly discuss the bailout costs of financial crises. They point out that the estimates vary widely and, more importantly, that the true costs extend beyond the commonly quoted bailout costs to cover the fiscal impact of reduced tax revenue and other fiscal stimulus costs. Whatever the true costs, however, they are large. Table 4.5 shows that the 1984–1991 U.S. savings and loan (S&L) crisis cost somewhere between 2.4 ...