The relation between foreign-exchange and banking crises in emerging countries: Information and expectations problems

The banking system has played a key role in balance-of-payments crises in a number of emerging countries. This article reviews three types of models which analyse the different factors involved in recent foreign-exchange crises. These usually stem at least partly from balance-of-payments problems; financial vulnerability causes the currency to collapse and undermines the banking system, thus generating a vicious circle. This paper shows that financial stability is by no means guaranteed, particularly in a globalized financial system. Emerging countries have to strike a balance between economic and financial stabilization, while maintaining their share of new capital flows. Although a difficult task, this is essential for avoiding a repeat of past crisis episodes, the threat of which apparently cannot be ruled out.