The current banking crisis has reminded us of how risks materialising in one part of the financial system can have a widespread impact, affecting other financial markets and institutions and the broader economy. This paper, prepared on behalf of the Actuarial Profession, examines how such events have an impact on the entire financial system and explores whether such disturbances may arise within the insurance and pensions sectors as well as within banking. The paper seeks to provide an overview of a number of banking and other financial crises which have occurred in the past, illustrated by four case studies. It discusses what constitutes a systemic event and what distinguishes it from a large aggregate system wide shock. Finally, it discusses how policy-makers can respond to the risk of such systemic financial failures.

This article reexamines the period of the Japanese bubble (1985–1990) and emphasizes ill-supervised and ill-sequenced financial deregulation as a key proximate factor. Given the subsequent costs of this political choice, what explains such a path of domestic financial deregulation without the establishment of corresponding supervisory institutions? I argue that the suboptimal Japanese outcome represents the equilibrium point for political leaders who had to balance global pressures to deregulate the economy, corporate pressures to liberalize finance, and domestic resistance by an array of politically connected interest groups. The government chose ill-supervised financial deregulation as the path of least political resistance and the golden bullet that could both defuse trade tensions with the United States and readjust the Japanese political economy in a harmless way. Instead, as they interacted with other factors, the choices made in the early 1980s destabilized the Japanese system and carried the seeds of the ensuing financial crisis.