Abstract
Since the global financial crisis of 2008–2009, much energy has been devoted to efforts to strengthen national and international financial systems. One way of gauging the adequacy and success of those efforts is to “stress test” them against scenarios of major shocks to national economies and international financial markets. I undertake this exercise in the present paper and conclude that recent efforts to strengthen the financial architecture have been only partially successful. The next crisis will not resemble the last crisis, but a next crisis there will inevitably be.
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Notes
See Basel Committee on Banking Supervision, “Report on Special Purpose Vehicles,” Basel: Bank for International Settlements (September 2009).
Mark Carney, “The Future of Financial Reform,” 2014 Monetary Authority of Singapore Lecture (17 November 2014), http://www.financialstabilityboard.org/press/speeches/.
Anat Admati and Martin Hellwig, The Bankers’ New Clothes: What’s Wrong with Banking and What to Do About It (Princeton University Press 2013).
In addition it is widely observed that the 2007–2008 crisis in the United States did not originate in deposit-taking commercial banks to which the Volcker Rule is intended to apply.
Sylvia Merler, “Vicious Circle(s) 2.0,” Bruegel (20 November 2014), http://www.bruegel.org/nc/blog/detail/article/1484-vicious-circles-20/.
On that criticism, see David Beim, “Report on Systemic Risk and Bank Supervision,” Draft, September 10, 2009, www.propublica.com.
As I argued as early as 2007: Barry Eichengreen, “The Break-Up of the Euro Area,” NBER Working Paper no. 13393 (September 2007).
Others have argued that the EU could survive a Eurozone break-up. See Francois Heisbourg, “The EU without the Euro,” Survival: Global Politics and Strategy 56, pp. 27–48. I am not convinced.
A detailed analysis is Ashoka Mody, “Did the German Court Do Europe a Favour?” Working Paper no. 2014/09, Brussels: Bruegel (July).
Richard Roberts, Saving the City: The Great Financial Crisis of 1914 (Oxford University Press, 2013). For more general evidence see Roberto Rigobon and Brian Sack, “The Effects of War Risk on US Financial Markets,” NBER Working Paper no. 9609 (April 2003); Gerald Schneider and Vera Troeger, “War and the World Economy: Stock Market Reactions to International Conflicts,” Journal of Conflict Resolution 50 (2006), pp. 623–645.
Such as Mark Carney in the speech cited in footnote 2 above.
Alexander Mehra, “Legal Authority in Unusual and Exigent Circumstances: The Federal Reserve and the Financial Crisis,” University of Pennsylvania Journal of Business Law 13, pp. 221–273. Under the rules issued in response to the Dodd-Frank Act, the Fed’s lending powers are now limited to extending credit to participants in a program or facility “with broad-based eligibility” and require prior approval from the Secretary of the Treasury.
See Andrew Haldane, “Managing Global Finance as a System,” Text of the Maxwell Fry Annual Global Finance Lecture, Birmingham University, Birmingham (29 October 2014).
For an example, with references, see José Antonio Ocampo, “The Provision of Global Liquidity: The Global Reserve System,” WIDER Working Paper 2014/141, Helsinki, WIDER (October).
International Monetary Fund, Annual Report on Exchange Arrangements and Exchange Restrictions, Washington, D.C.: IMF (2014), p. 6.
See Financial Stability Board, “Global Shadow Banking Monitoring Report 2013,” Basel: Financial Stability Board (30 October 2014).
Hyun Song Shin and Laura Yi Zhao, “Firms as Surrogate Intermediaries: Evidence from Emerging Economies,” unpublished manuscript, Princeton University (December 2013).
See Jens Nordvig et al., “’Hidden Debt’ in Emerging Markets: Part I,” New York: Nomura (4 March 2014). In December 2014 the Bank for International Settlements warned of the deadly cocktail of large foreign-currency-denominated (mainly dollar) exposures together with a strengthening US exchange rate (where the latter reflected the expectation of Federal Reserve tightening)—see Bank for International Settlements, “Buoyant Yet Fragile?” BIS Quarterly Review (December 2014), pp. 1–12.
The saving grace here, if there is one, is that investors can see the Russian crisis coming and prepare by limiting their exposures to the economy, in turn limiting the fallout.
See Kyuil Chung, Jong-Eun Lee, Elena Loukoianova, Hail Park and Hyun Song Shin, “Global Liquidity through the Lens of Monetary Aggregates,” IMF Working Paper no. 14/9, Washington, D.C.: IMF (January 2014).
Lant Pritchett and Lawrence Summers, “Asiaphoria Meet Regression to the Mean,” unpublished manuscript, Harvard University (November 2013).
Barry Eichengreen, Donghyun Park and Kwanho Shin, “When Fast Growing Economies Slow Down: International Evidence and Implications for China,” Asian Economic Papers 11 (2012), pp. 42–87.
Estimates in this paragraph are from Haibin Zhu, Grace Ng and Lu Jiang, “Ten Questions About China,” J.P. Morgan Economic Research, Hong Kong: J.P. Morgan (28 November 2014).
Mark Weidenmaier and Mitu Gulati, “A People’s History of Collective Action Clauses,” Virginia Journal of Inernational Law 54, pp. 51–95.
Lee Buchheit and Mitu Gulati, “Exit Consents in Sovereign Bond Exchanges,” UCLA Law Review 59, pp. 59–84.
Ben Emons, “Collective Action Clauses: No Panacea for Sovereign Debt Restructurings,” PIMCO Viewpoints, Santa Monica: PIMCO (October 2012).
International Monetary Fund, “Strengthening the Contractual Framework to Address Collective Action Problems in Sovereign Debt Restructuring,” IMF Policy Paper (2 September 2014).
Elaine Moore, “Kazakhstan First to Introduce Post-Argentina Bond Contracts,” Financial Times (5 October 2014), http://www.ft.com/intl/cms/s/0/2d0283e4-4aec-11e4-b1be-00144feab7de.html?siteedition=intl#axzz3FQFZmMeC.
For the intellectual history see David Graham, “Rumsfeld’s Knowns and Unknowns: The Intellectual History of a Quip,” The Atlantic (27 March 2014), http://www.theatlantic.com/politics/archive/2014/03/rumsfelds-knowns-and-unknowns-the-intellectual-history-of-a-quip/359719/.
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Eichengreen, B. The next financial crisis. Econ Polit 32, 53–66 (2015). https://doi.org/10.1007/s40888-015-0004-0
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DOI: https://doi.org/10.1007/s40888-015-0004-0