Systemic Risk and Financial Crises

Franklin Allen is the Director of the Brevan Howard Centre for Financial Analysis at Imperial College London (United Kingdom). Until the end of June 2014, professor Allen was the Nippon Life Professor of Finance and Economics at The Wharton School of the University of Pennsylvania (United States). Franklin Allen’s main areas of interest are corporate finance, asset pricing, financial innovation, comparative financial systems, and financial crises.

The Lectures started with an overview of the different types of systemic risk and how they lead to financial crises. The subsequent lectures focused on the different types of systemic risk and policies to avoid them or lessen their impact:

Lecture 2: Panics – banking crises due to multiple equilibria: The traditional view of financial crises was that they were due to panics. The famous multiple equilibria models of Bryant (1980) and Diamond and Dybvig (1983) and subsequent developments will be considered.

Lecture 3: Banking crises due to asset price falls: Another important type of systemic risk is that due to asset price falls. There can be many reasons for this and these will be discussed in this lecture. They include: (a) the bursting of real estate bubbles; (b) the bursting of other asset price bubbles; (c) a rise in interest rates; (d) sovereign default; (e) mispricing due to limits to arbitrage; (f) business cycle; (g) mispricing due to “flash crashes”; (h) politics.

Lecture 4: Contagion: This lecture will focus on different models of contagion. The first type looks at how networks of claims can lead to a meltdown in the financial system. The second type looks at other kinds of interconnectedness arising from informational links.

Lecture 5: Financial architecture and foreign exchange mismatches in the banking system: Many effects of the recent financial crisis were amplified by failures in the functioning of the financial architecture. Although in the recent crisis, foreign exchange mismatches did not play a large role, in previous ones such as the Asian Crisis of 1997, they have done. This lecture will consider both these types of systemic risk.

Lecture 6: Money and financial crises: Most models of financial crises involve real analyses and ignore the role of money. In practice though, many policies to counter the effects of financial crises such as quantitative easing involve printing money. This lecture will consider these types of policy and their effects on the real economy.