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The last month has seen massive upheaval in global markets, caused in part by the failure of two of the three largest banks in U.S. history. The acquisition of Swiss lender Credit Suisse by UBS Group AG has also contributed to investor fears of banking contagion and the potential impact of higher interest rates on global economies. Here we look at some of the biggest financial crises of the last 40 years.
One of the earliest and most significant crises was the US Savings and Loan crisis, which lasted throughout the 1980s. Over 1,000 savings and loan institutions were wiped out as a result of the crisis, and taxpayers were left to foot a bill of up to $124 billion. The crisis was caused by unsound real estate and commercial loans made by S&Ls after interest-rate caps on their loans and deposits were removed.
Another crisis that occurred in the 1980s was the Junk Bond Crash, which saw the market for high-yield bonds collapse following interest rate hikes by the Federal Reserve. Michael Milken had helped popularize the financial instrument as a means of funding leveraged buyouts. However, supply eventually exceeded demand, leading to the market's decline. Milken was charged with securities and reporting violations, paying a $200 million fine and serving a 22-month sentence in jail.
Moving into the 1990s, the Mexican Peso Crisis saw the country devalue its currency in 1994, following a growth in the current account deficit and decline in international reserves. Mexico received external financial support from the International Monetary Fund and a $50 billion bailout from the United States.
The Asian Currency Crisis also occurred in the 1990s, with a massive outflow of capital from Asian economies putting pressure on their currencies. The crisis began in Thailand, where authorities had to devalue the Thai baht after trying to defend its peg to the dollar drained forex reserves. The contagion then spread to other markets in Asia, including Indonesia, South Korea, and Malaysia. International bodies, including the World Bank and International Monetary Fund, had to intervene with rescue packages totaling more than $100 billion for these economies.
The biggest financial crisis since the Great Depression was the Global Financial Crisis of 2008, rooted in risky loans to shaky borrowers, which began to lose value after central banks raised interest rates. The crisis led to the collapse of some of the most prominent Wall Street giants, including Bear Stearns and Lehman Brothers. The crisis also engulfed insurance giant American International Group, which required a $180 billion bailout. Washington Mutual, the largest-ever failure of a U.S. bank, was closed by the U.S. government, leading to the worst economic downturn in 70 years, known as the "Great Recession."
In summary, the last four decades have seen some of the most significant financial crises in history, affecting global markets and economies. While the causes of these crises vary, they often involve risky financial instruments and unsound lending practices, leading to a collapse in markets and the need for external financial support to prop up failing institutions. Investors will hope that lessons learned from these crises will help prevent future upheaval in the markets.
