Lending of Last Resort, Moral Hazard and Twin Crises: Lessons from the Bulgarian Financial Crisis 1996/1997

Michael Berlemann (), Kalin Hristov () and Nikolay Nenovsky ()

No 464, William Davidson Institute Working Papers Series from William Davidson Institute at the University of Michigan

Abstract: In 1996/1997 Bulgaria was hit by a severe financial crisis, spreading from a banking crisis to a currency crisis. While being widely neglected by the financial crisis literature and the international discussion we argue that the Bulgarian Financial Crisis might serve as an illustrative example of a twin crisis primarily (but not only) due to systematic moral hazard behaviour of the banking sector. Thus, the Bulgarian Financial Crisis might be closer to the story of third generation moral hazard models of currency crises than the Asian Crisis. We also show how Bulgaria managed to overcome the crisis by introducing a second generation currency board allowing the central bank to act as a strictly limited lender of last resort thereby (hopefully) making the country less prone to a financial crisis in the future.

Keywords: Financial Crises; Bulgaria; Lender of Last Resort; Twin Crises; Currency Boards (search for similar items in EconPapers)
JEL-codes: E42 E5 F02 P34 (search for similar items in EconPapers)
Pages: 68 pages
Date: 2002-05-21
New Economics Papers: this item is included in nep-fin, nep-ifn and nep-pke
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (12)

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Working Paper: Lending of last resort, moral hazard and twin crises. Lessons from the Bulgarian financial crises 1996/1997 (2002)
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