One of globalization’s most sweeping effects has been to transform closed, government-controlled financial systems into free markets open to foreign investors. Over the past two decades, surging capital flows have reduced funding costs for corporations and enabled investors to reap higher risk-adjusted returns. But unfettered capital markets have a downside: increasingly frequent economic breakdowns, particularly in emerging economies. More than 65 serious financial crises have erupted over the past ten years—almost one and a half times the number recorded during the 1980s.¹

Last year alone, Argentina suffered a bank shutdown and a severe devaluation when it defaulted on its government debt, and a long-smoldering crisis flared in Turkey after one of the country’s largest banks went under, causing confidence to crumble. Industrialized countries are also vulnerable, as Sweden found in 1992, when a real-estate-market bubble burst, plunging banks into the red and causing the value of the krona to plummet.

Yet no matter how real the threat of national financial meltdown might be, and no matter how devastating the consequences, many companies seem disinclined to safeguard themselves—even though, in our experience of dozens of such events over the past 15 years, managers can take many precautions. Obvious measures...