Preface

This book is about financial crises and it is written at a time when the whole world is facing yet another crisis, a different one this time; one that is related to health, but which is also already affecting the global economy in quite a painful manner. Amidst the grief and pain caused by the Covid-19 pandemic, the world must also find ways to combat its economic consequences. So far, we have seen bold moves by several governments and central banks, which through the combined use of fiscal and monetary policy measures are trying to mitigate the economic effects of Covid-19. The first chapter of this book provides an initial overview of the effects of the pandemic on the global economy and in particular on the financial sector and banks and by doing so provides a "bridge" for the chapters that will follow and which address various aspects of the previous financial crisis (2007-2009).

There is no doubt that the Global Financial Crisis (GFC) of 2007-2009 is an important point of reference in the literature of economic and – in particular – financial crisis; inevitably, this book focuses on this crisis in several dimensions. One of the themes discussed extensively after the GFC was corporate governance and whether failures in this aspect were related and to what extent to the unfolding of the GFC. Chapter 2 addresses this issue by examining the relationship between stock volatility and outside directors and independent directors for a sample of French firms over the period 2006-2012. Results indicate that outside directors and audit size tend to increase the stock return volatility. Moreover, results also indicate that independent directors and ROA have a negative effect on the volatility of stock returns, thus contributing to stabilizing the behavior of the price of stocks.

The third chapter turns its attention to the sources of the Great Recession, and document the following three important findings: firstly, the "net-worth shock" of financial firms had gradually declined prior to a huge decrease of the net worth of non-financial firms; secondly, the net worth shock of non-financial firms accounted for a large proportion of the business cycle after the Great Recession; and finally, the Troubled Asset Relief Program (TARP) would have immediately worked to improve balance sheets of financial institutions. It is worth noting that the chapter also presents evidence that the aforementioned were further worsened by the collapse of the Lehman Brothers in September 2008.

Chapter 4 discusses the political and institutional dynamics behind the Global Financial Crisis. More specifically, the chapter focuses on asset securitization, which by reducing lending rates and transaction costs and enhancing liquidity in the market, has been described as the alchemy that "really works". Nonetheless, the chapter points out that this has been questioned in the context of the Global Financial Crisis by presenting a number of factors, which made the alchemy not work very well. More specifically, such factors are subprime lending, executive compensation, and de-regulation, among others, which the chapter discusses both from a political and institutional perspective.

The final chapter of the book presents an interesting case for Turkey and more specifically focuses on the effect of external factors on Turkish short-term interest rates and exchange rates. The analysis presents findings over both tranquil and politically stressed periods of time; the overall period examined is 2011-2018. The factors employed are the short-term interest rates of the USA and emerging markets risk premia and the chapter points out that even a little political development may cause serious volatility in the market.

The ideas presented in this book are hopefully fresh and stimulating; however, it should be noted that these are owed not only to the research carried out in this book, beyond that, but they have also often been "borrowed" from other exceptional researchers, as well as to discussions with a number of curious students. We would like to thank all of them. Moreover, I would also like to thank the IntechOpen publishing team, and in particular, Ms. Rozmari Marijan, Ms. Rebekah Pribetic, and Ms. Mia Vulovic for their patience and great support throughout this project.

> **Dr. Stelios Markoulis**, University of Cyprus/Cyprus International Institute of Management, Cyprus

> > Section 1

Introduction

Section 1 Introduction

**3**

**Chapter 1**

Crises

**1. Introduction**

*Stelios N. Markoulis*

system; and Section 4 concludes.

the Great Depression (see **Figure 1**).

**system**

Introductory Chapter: Financial

This book aims to present a collection of research papers which are related, in one way or another, to financial crises. The work contained herein ranges from topics such as the sources, origins and political and institutional dynamics of the global financial crisis we had during 2007/09 (GFC) to the liberalisation of economies, macroeconomic development, and the behaviour of interest and exchange rates during periods of political turmoil. Naturally, given its importance and far-reached economic, political and social effects across the globe, the majority of the chapters that will follow are related to the GFC. However, the timing of writing the introduction to this book is such that I strongly believe that the effects (and potential effects) on the financial system and banks of another crisis—a very different one—need to be addressed; I am referring of course to the ongoing economic crisis caused by the COVID-19 pandemic. As such, the prime aim of this chapter is to discuss the effects of this latter crisis on the global economy and the financial sector, in particular, and in doing so provide a 'bridge' between what is discussed in the chapters that follow and what is actually happening around us at this time. The chapter unfolds as follows: Section 2 discusses the effect of the pandemic on the world economy and the financial system; Section 3 deals with the banking

**2. The effect of COVID-19 on the world economy and the financial** 

There is little doubt that the COVID-19 pandemic has caused an extraordinary human and health crisis. The measures taken by governments all over the world necessary to contain the virus have resulted in an economic downturn whose severity and length are still quite uncertain. Initially, the pandemic was seen as a China/ Asian regional shock; however, very quickly, it became apparent that the virus was 'travelling' quickly and that the shock would indeed be a global one. It is now clear that the last time the world economy suffered such a shock was after the demise of Lehman Brothers in September 2008. Under this 'prism', Baldwin and Tomiura [1] point out that the GFC could provide a broad perspective on the range of likely outcomes this time around; more specifically, the authors refer to what came to be known as the 'great trade collapse', which was the steepest fall in world trade since

As far as global economic growth is concerned, recent IMF estimates [2] indicate

a decline of 3% for 2020, which incidentally is worse than the one experienced during the GFC. At the same time, the timing and—importantly—the shape of a potential future recovery remain uncertain. Within this context, Mann [3] argues
