Systemic financial crises : a cluster analysis

1. Introduction Over time, systemic crises affected most countries, being, however, events that are characterized by great diversity in terms of initial macroeconomic conditions, causes and triggers, level of development of affected countries and their openness towards the rest of the world, existing institutional framework and external conditions, etc. (Cecchetti, Kohler and Upper (2009), Laeven and Valencia (2010), Thalassinos (2006), Thalassinos et al., (2010)). In these circumstances, achieving a robust research in the field of systemic financial crises, and particularly in the field of effective policies for the management of these crises, is extremely difficult if we consider that these are unusual events, often unpredictable, highly heterogeneous and influenced by many variables. The difficulty is even greater in quantitative research due to endogeneity, i.e. the inability to fully allocate macroeconomic results to a particular type of economic policy (for example, the fiscal one or the monetary one), as they relate to other influences, such as initial conditions, triggers, subsequent events, etc. One of the solutions offered in the literature to overcome these difficulties is the analysis of the effectiveness of crisis management policies in classes of crises as homogeneous in terms of causes, triggers, effects, costs and future developments. In this context, in the present study we assumed that the economic recovery policies have different effects during crises than when such events did not take place and we intend to achieve a multicriteria classification of systemic crises in homogeneous groups. Also, in our analysis, we follow the approach present in many studies in the literature (Cecchetti, Kohler and Upper (2009), Laeven and Valencia (2008)) and analyze crises within national borders because, regardless of their magnitude, they are often managed at the national level, even if they are regional or global, like the current one. On the concept of systemic crisis, the literature offers a multitude of approaches, but for the purposes of this study, we will work with the definition given by Laeven and Valencia (2010), who believe that a crisis is systemic if two conditions are met: (1)--significant signs of financial distress in the banking (as indicated by significant bank runs, losses in the banking system, bank liquidations) and (2)--significant banking policy intervention measures in response to significant losses in the banking system (Laeven and Valencia (2010, p. 6)). The remainder of this paper is organized as follows: the literature review and theoretical foundations on the effectiveness of crisis management policies are found in Section 2, the research methodology and data in Section 3, results and interpretation in Section 4, and finally the concluding remarks are found in Section 5. 2. The Effectiveness of Crisis Management Policies Because the high costs of systemic crises require decisive action taken by authorities, researchers have turned increasingly more attention to the effectiveness of the policies designed to prevent and limit crises consequences. Among the most important policies, mentioned in the literature (Laeven and Valencia (2008), Jacome (2008), Richardson and Troost (2006), Detragiache and Giang Ho (2010)) are: liquidity support; assets purchase; government guarantees on deposits, deposit freeze, forbearance from capital requirements, government subsidies, debt cancellation, establishment of asset management companies, sales and recapitalizations of financial institutions assisted by the government. Regarding the effectiveness of these policies, Laeven and Valencia (2008, p. 6-20) demonstrated, through a partial correlation analysis, that some are more efficient (the introduction of a general guarantee on all deposits), while others are costly and do not accelerate the process of economic recovery (liquidity support, government guarantees for certain financial institutions, forbearance from prudential regulations, bank closures and the establishment of asset management companies). …