One remarkable feature of the current financial crisis has been the speed and apparent synchronicity with which it has spread around the globe. While it originated in the United States, it has affected not only economies that shared similar vulnerabilities, in particular the exposure of financial institutions to toxic assets, but it spread to virtually all economies, advanced and emerging alike. Moreover, the crisis has not been limited to the sphere of financial markets but has had a major impact on real economic activity, inducing the largest global recession since the Great Depression. Even after an initial decoupling of emerging market economies (EMEs), global economic activity became temporarily highly synchronized in the second half of 2008 and the first half of 2009.
Different hypotheses have been put forward as to why the crisis has become truly global in reach. A first hypothesis is that of liquidity, and the fact that credit markets and in particular interbank markets became highly illiquid, leading to the collapse or near collapse of numerous financial institutions and severely curtailing the capital available to the real side of the economy (e.g. Adrian and Brunnermeier (2009), Brunnermeier and Petersen (2010), Shin et al. (2010), Borio (2009)). A second hypothesis relates to the pricing of risk. While financial institutions in North America and Europe were highly leveraged and exposed, financial institutions in many EMEs, in particular in Asia and Latin America were not. Moreover, the financial crisis triggered a massive reversal of private capital flows globally or what has been dubbed a "flight to safety" phenomenon with capital exiting in particular EMEs and being shifted from relatively risky financial assets into safer assets such as US treasuries. Such a reallocation of global capital related to a re-pricing of risk may thus have spread the crisis, and even to countries and regions that had been less exposed through the liquidity channel.
Financial risk management has undergone much change and greater regulation in the last twenty years following, and in many ways in response to, the major stock-market crash (“Black Monday”) of October, 1987. Now, another major market incident, the global financial crisis (GFC) in 2008-09, has prompted calls for more and different financial regulation. In order to better control the risk of financial institutions and to protect them against large unexpected losses, the group of G-10 countries agreed in 1988 to sponsor and subsequently form the original Basel Capital Accord.
Theories of banking and financial intermediation have come a long way, elaborating on the benefits and the inherent fragility of banking systems. In the meantime, macroeconomists have made a variety of attempts to incorporate realistic financial intermediaries l banks in particularl in dynamic general equilibrium models. A juxtaposition of the standard models of banking (Diamond and Dybvig 1983, Allen and Gale 1998, 2004) with a few dynamic macroeconomic models (Calstrom and Fuerst 1997, Gertler and Kiyotaki 2011) can clearly point to a yet to be filled gap between the micro theory of banking and macroeconomics.
