Balancing the Banks: Global Lessons from the Financial Crisis

Balancing the Banks: Global Lessons from the Financial Crisis

Balancing the Banks: Global Lessons from the Financial Crisis

Balancing the Banks: Global Lessons from the Financial Crisis

Synopsis

The financial crisis that began in 2007 in the United States swept the world, producing substantial bank failures and forcing unprecedented state aid for the crippled global financial system. Bringing together three leading financial economists to provide an international perspective, Balancing the Banks draws critical lessons from the causes of the crisis and proposes important regulatory reforms, including sound guidelines for the ways in which distressed banks might be dealt with in the future.

While some recent policy moves go in the right direction, others, the book argues, are not sufficient to prevent another crisis. The authors show the necessity of an adaptive prudential regulatory system that can better address financial innovation. Stressing the numerous and complex challenges faced by politicians, finance professionals, and regulators, and calling for reinforced international coordination (for example, in the treatment of distressed banks), the authors put forth a number of principles to deal with issues regarding the economic incentives of financial institutions, the impact of economic shocks, and the role of political constraints.

Offering a global perspective, Balancing the Banks should be read by anyone concerned with solving the current crisis and preventing another such calamity in the future.

Excerpt

The recent financial crisis was a mix of “unique” and much more conventional events. This short book offers our perspective on what happened and especially on the lessons to be learned in order to avoid a repetition of this large-scale meltdown of financial markets, industrial recession, and public deficits. Chapter 2 provides a diagnosis of what went wrong and discusses some key financial regulation reforms. Chapter 3 takes a more detailed look at the flaws in the prudential framework that was in place when the crisis erupted and at the required remedies, and chapter 4 focuses on the treatment of distressed banks, a key element of this prudential framework. This introduction takes a more general look at the rationale for and challenges of banking regulation.

REGULATION IN A HISTORICAL PERSPECTIVE

What degree of regulation of the banking sector is appropriate has been a controversial question for almost a century. The Great Depression, with its wave of bank failures triggered by bank runs, led in the 1930s to heavy-handed regulation, combining deposit insurance, interest-rate regulations, barriers to entry, restrictions on activities (compulsory specialization), and constraints on bank size. Although the succeeding decades witnessed a return to stability, the banking system gradually became perceived as inefficient and poorly innovative. In order to encourage cost-cutting and innovation, and to induce banks to pass efficiency gains on to consumers, governments deregulated the banking industry and fostered competition from the 1970s on. This trend was also the result of pressure from commercial banks, which were facing . . .

Search by... Author
Show... All Results Primary Sources Peer-reviewed

Oops!

An unknown error has occurred. Please click the button below to reload the page. If the problem persists, please try again in a little while.