The Role of External Balance Sheets in the Financial Crisis

Gross external balance sheets are important in explaining the incidence of the financial crisis across economies. Just as for banks, leverage of the national balance sheet was an indicator of subsequent vulnerability. Countries that also experienced strong domestic credit growth, in part fueled by ‘savings glut' net capital inflows, suffered particularly badly. And banks' balance sheets were critical in the transmission mechanism: high gross external interbank debt — the ‘banking glut' — and maturity and currency mismatches, contributed to foreign rollover risk