What can countries do to avoid a financial crisis?

In this paper we focus on the factors which can lead to financial crises that are more universal than specific factors such as financial panic, poor fundamentals, structural weaknesses or misguided macroeconomic policies. The factors we concentrate on are based on economic logic, and hence render every country potentially vulnerable to a financial crisis. We call them the 'basic ingredients' of a financial crisis, 'basic' in the sense that they are based on fundamental economic logic, common to all open economies, and can prepare the breeding ground for financial crises everywhere. In Section 2 of this paper, we identify the two basic ingredients of a financial crisis, and point out that the possibility of financial crises cannot be eliminated virtually anywhere. Section 3 elaborates on information asymmetry and moral hazard. In the last section we discuss policy measures and their implications. We close with concluding remarks.