Abstract
The authors set out how all crises should be managed according to four key steps and contrast this with what authorities actually did in different jurisdictions following 2008 (showing the USA to be closer to the mark than Europe). They raise two questions that have occupied policy makers since then: how to exit from emergency measures and what reforms are needed. The authors present and analyse the different proposals including inter alia: dealing with too big to fail; improving corporate governance; ensuring capital adequacy; and separating investment and deposit banking. Based on observed facts about the crisis, they present a number or a priori ideas about capital regulation and bank business models, setting the scene for a fuller discussion based on empirical evidence in subsequent chapters.
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Notes
- 1.
If they had strong empirical research on the determinants of bank risk, authorities would not have announced a system like Basel II.
- 2.
See the Statement by Mr. Angel GurrÃa (2008), Secretary General of the OECD.
- 3.
IMF, US Article IV Staff Report (2007).
- 4.
Federal Open Market Committee (2007).
- 5.
See CNBC television footage. Cramer’s meltdown was mentioned at the August 7 FOMC meeting, with members laughing.
- 6.
Other countries followed, with Europe at mostly around €100,000, Australia moved to cover all deposits (subsequently increased to a maximum of A$1 million per customer).
- 7.
See Blundell-Wignall (2013).
- 8.
It is worth noting at this stage that a resolution regime needs to be in place that has some credibility to help avoid this—i.e. that the external costs of allowing a firm to fail are sufficiently small that it will not cause major systemic problems. The USA, where many banks fail, has proved better at this issue than Europe, in the opinion of the current authors.
- 9.
See EBA (2016) for a summary of the structure of covered bonds in different countries, especially Annex 2.
- 10.
Restrictive caps to such bonds could also be imposed, but banks that find covered bonds an attractive cheap source of funding lobby against this.
- 11.
Without this, uncertainty about asset quality can make it impossible to value the portfolio. This creates major difficulties in attracting the capital needed to allow it either to operate on a stand-alone basis or to be taken over by an existing bank.
- 12.
See Lumpkin (2008).
- 13.
See FHFA (2017).
- 14.
- 15.
See Brown and Enrich (2008).
- 16.
Their employment contracts should be independent of the CEO, and they should report to the board. See OECD (2009b) for more observations about corporate governance.
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Blundell-Wignall, A., Atkinson, P., Roulet, C. (2018). Managing the Crisis, Exit and Requirements of Reform. In: Globalisation and Finance at the Crossroads. Palgrave Macmillan, Cham. https://doi.org/10.1007/978-3-319-72676-2_5
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