The contagion effects of a crisis can be heavily amplified by the contraction of liquidity in funding and asset markets. 2. The credit cycle is a major driver of risk in the financial system – the seeds of crises are often sewn in the credit booms that precede them. 3. Large bank failures can have devastating effects on both financial systems and government finances.
Governments must find ways of protecting the financial system from bank failures without having to resort to bail-outs. I will look at these three lessons in turn, considering the broad international responses we have seen, and looking specifically at what we are doing here in New Zealand.