Learning from History: Volatility and Financial Crises

We study the effects of volatility on financial crises by constructing  a cross-country database spanning over 200 years. Volatility is not a significant predictor of crises  whereas unusually  low volatility is. Low volatility is followed by credit build-ups and increased balance sheet leverage in the financial system, indicating that agents take more risk in periods of low risk, and increasing the likelihood of a banking crisis. That is, stability in the system endogenously creates instability. Such impact is weaker in times of relatively strong financial regulations