Crises & Crashes

Financial crises have a grammar. Excess credit meets a trigger, interbank trust breaks, the authorities choose between moral hazard and contagion, and the rules get rewritten in the rubble. The same pattern repeats across six centuries, which is why the episodes collected in this hub — from the Baring Crisis of 1890 to the collapse of Lehman Brothers in 2008 — read less like isolated disasters and more like variations on a theme.

What changes from one crisis to the next is mostly the technology. The counterparty risk that felled the Medici bank's London branch in the 1470s was the same risk that took down Continental Illinois in 1984 and Northern Rock in 2007. The wholesale funding panic that ruined Barings in 1995 was the same panic that drained Iceland's banks in a single week in October 2008. The sovereign illiquidity that put Argentina on the edge in 2001 had already put Russia on the edge in 1998, and both looked structurally like Mexico in 1994.

What this topic covers

Three questions run through every article in this hub:

• How the system actually broke — the specific failure mechanism, not the headline narrative
• Who acted as lender of last resort, and on what terms
• What rules changed afterwards — and which problems returned under new names

A timeline of the canonical crises

How crises in this hub tend to unfold

Read enough of these in sequence and a structural pattern surfaces. The first phase is typically a long credit expansion masked by some real-economy story — railroad mileage, mortgage securitisation, peripheral-eurozone convergence — that lets risk accumulate without obviously mispricing assets. The second phase is the trigger: a single failure, often surprisingly small relative to the eventual damage, that breaks the assumption interbank trust depended on. Within days the wholesale funding markets seize, prime-broker balances drain, and any institution whose business model required perpetual access to cheap rollover funding finds itself undercapitalised in fact even if not on paper.

The third phase is the political choice. Authorities pick between two unattractive options: bail out the most exposed firms and accept the moral-hazard cost, or let them fail and accept the contagion cost. The choice usually depends less on principle than on whether the failing firm's counterparties are concentrated or diffuse, and whether the political moment can absorb a public rescue. The fourth phase is rule-writing — Basel I after Herstatt, Sarbanes-Oxley after Enron, Dodd-Frank after 2008 — which works for a generation and is then routed around by the next set of institutions clever enough to exploit the gaps.

Modern parallels

The 2023 banking crisis (SVB, Signature, First Republic, Credit Suisse) compressed the standard arc into roughly two weeks. The wholesale-funding panic that took years to develop in 1907 and months in 2008 happened over hours via mobile banking and venture-capital chat groups. The pattern itself was unchanged. Concentration risk in uninsured deposits, hidden held-to-maturity losses, and insufficient capital relative to interest-rate sensitivity — every one of those mechanisms had a precedent in this hub. What was new was the speed.

Start here

If you read three articles from this hub, read these:

• The Panic of 1907 — the crisis that finally forced Congress to build a central bank
• The 2008 Financial Crisis — shadow banking, the repo run, and the weekend that broke the system
• The Baring Crisis of 1890 — the template for every sovereign rescue since

For the long view, follow them with the Long Depression and the Asian Financial Crisis, which together cover the two great waves of nineteenth- and twentieth-century cross-border financial integration breaking.