The New Reality of Overlapping Crises: Insights for Managers and Policymakers

by Alexandre Siqueira and Sylvia Gottschalk

Financial crises rarely occur in isolation anymore. When banking, currency, debt crises -and recessions- overlap, their impact on firms is profound. Our latest research explores how these combined shocks reshape profitability—and what managers and policymakers can do about it.

The global economy has become increasingly interconnected, and with that interconnection comes vulnerability. Financial crises rarely occur in isolation anymore. Instead, they often overlap—banking crises coincide with currency collapses, debt defaults, and recessions. These combined crises are not just a theoretical concern; they have become a defining feature of the 21st-century economic landscape.

While economists have long studied the macroeconomic effects of crises, the question of how these shocks affect firms—especially their profitability—remains less explored. Our recent research addresses this gap by examining how different types of crises, alone and in combination, influence firm-level performance across emerging and mature economies.

Why Combined Crises Matter

Single crises, such as a banking or currency crisis, are disruptive enough. But when crises overlap, their impact is not simply additive—it is multiplicative. Previous studies have shown that combined crises deepen macroeconomic distress, yet firm-level implications have been largely overlooked. This matters because firms operate within these turbulent environments, and their ability to adapt determines not only their survival but also broader economic recovery.

A New Taxonomy of Crises

To understand these dynamics, we developed a taxonomy that categorizes crises into single and combined episodes, considering four types of shocks: banking, currency, debt, and recession. Using data from 1975 to 2019 across emerging and mature economies, we identified patterns that reveal stark differences between these two groups. Emerging economies experience combined crises far more frequently, while mature economies tend to face isolated shocks.

What Drives Profitability During Turbulence?

Our analysis shows that firm characteristics do not behave uniformly across different crisis scenarios:

  • Leverage consistently erodes profitability, regardless of whether times are tranquil or turbulent.
  • Gross margin supports profitability, particularly in non-crisis periods.
  • Firm size has a surprising effect: larger firms tend to perform worse in stable times.
  • Other factors—such as liquidity, age, external finance dependence, and ownership—shift in importance depending on the type of crisis and the country context.

These findings challenge the assumption that profitability drivers remain stable over time. Instead, they suggest that models explaining firm performance need to be recalibrated for different economic regimes.

Managerial Recommendations

  1. Stress-Test Financial Structures
    Regularly assess leverage and liquidity under multiple crisis scenarios. High leverage is a persistent risk factor—reduce debt exposure and maintain flexible financing options.

  2. Diversify Revenue Streams
    Gross margin plays a stabilizing role in profitability. Focus on product and market diversification to protect margins during downturns.

  3. Reassess Size and Complexity
    Bigger is not always better. Large firms may face higher rigidity during crises. Streamline operations and improve agility to mitigate vulnerability.

  4. Dynamic Risk Management
    Adopt adaptive models that account for regime changes. What works in tranquil times may fail during overlapping crises, so decision-making frameworks should be periodically recalibrated.

Policy Implications

  • Macroprudential Regulation
    Regulators should recognize that combined crises amplify systemic risk. Policies that strengthen banking systems and reduce currency volatility can help prevent cascading shocks.

  • Crisis-Responsive Support
    Government interventions—such as targeted credit lines or tax relief—should be tailored to firm characteristics, not applied uniformly. Smaller firms and those with high external finance dependence may need more immediate support.

  • Data-Driven Monitoring
    Policymakers should invest in early-warning systems that integrate firm-level indicators with macroeconomic signals to anticipate vulnerabilities before crises overlap.

Bottom line: Crises are not created equal, and when they combine, their impact on firms is profound and complex. Understanding these interactions is essential for building resilient businesses and economies in an increasingly volatile world.

References

Alexandre Siqueira and Sylvia Gottschalk “Crises, combined crises and their implications for firm profitability”, Journal of Risk Model Validation (forthcoming)