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Business Models of Banks and Global Contagion

  • Adrian Blundell-Wignall
  • Paul Atkinson
  • Caroline Roulet
Chapter

Abstract

The authors argue that the elephant in the room on bank risk is their business models which are largely untouched by reform. They contrast traditional deposit banking from models based on multiple collateralised counterparty agreements, where derivatives and structured products funded via securities transactions cause contagion risk—including adverse valuation shifts and/or defaults at various points in the hypothecation chains. Balance sheets of actual banks during the crisis and the size of derivatives transactions are used by the authors to illustrate these issues and they document bank losses which, despite all the support, are sobering. The authors argue that the underpricing of this risk (helped by credit ratings) was the core of the crisis and the AIG insurance debacle is shown to be one of its most dangerous events.

References

  1. Blundell-Wignall, A., & Atkinson, P. E. (2009). Origins of the Financial Crisis and Requirements for Reform. Journal of Asian Economics.  https://doi.org/10.1016/j.asieco.07.009.CrossRefGoogle Scholar
  2. Blundell-Wignall, A., Wehinger, G., and Slovik, P. (2010). The Elephant in the Room: The Need to Focus on What Banks Do. OECD Journal, Financial Market Trends, 2, 1–27.Google Scholar
  3. Hoenig, T. (2016, November 9). Strengthening Global Capital: An Opportunity Not To Be Lost—Remarks by FDIC Vice Chairman Thomas M. Hoenig to the 22nd Annual Risk US Conference, New York.Google Scholar
  4. Sorkin, R. (2009). Too Big to Fail. London: Allen Lane.Google Scholar

Copyright information

© The Author(s) 2018

Authors and Affiliations

  • Adrian Blundell-Wignall
    • 1
  • Paul Atkinson
    • 2
  • Caroline Roulet
    • 3
  1. 1.University of Sydney and OECD (consultant advisor to the Secretary General, and former Director of the Financial and Enterprise Affairs Directorate)ParisFrance
  2. 2.NHA Economics, Ltd.ParisFrance
  3. 3.Organisation for Economic Co-operation and DevelopmentParisFrance

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