Bank crises have become a more frequent occurrence in the post-Bretton Woods era, particularly in emerging markets. Bordo et al. (2001) report that the incidence of bank crises and “twin crises,” i.e., combined banking and currency crises, was higher in the 1973-1997 period than in the previous era or during the Gold Standard. They also find that such crises have been primarily an emerging market phenomenon. Similarly, Husain, Mody and Rogoff (2005) present evidence which demonstrates that emerging markets experience more banking and twin crises than do upper-income or developing economies. They point out that such economies are more exposed to capital flows than developing economies, but have more fragile financial sectors than the advanced economies.

Moreover, these events are costly. Honohan and Laeven (2005) place the fiscal cost of banking crises in developing countries over the last 25 years at over $1 trillion. Dobson and Hufbauer (2001) estimate an average output loss of 2 percent of GDP during each year of these crises. This cost extends over time as investment declines during a banking crisis, which reduces long-term growth.