Financial rescue and regulation

What is needed to strengthen financial sectors in the short and medium term?

Commentaries

  • The future of securities regulation

    Luigi Zingales, 26 January 2009

    In the 75 years since the enactment of the US Securities Act, securities markets could not have changed more. Concerns that afflicted investors then – lack of transparency and market manipulation – are not at the forefront today, partly thanks to the success of 1930s legislation. Two fundamental trends that alter the regulatory landscape Also important are two trends that have...

  • Financial regulation built on sand: Today’s microprudential regulation rules need macroprudential complements

    Hyun Song Shin, 31 January 2009

    The regulatory system stands accused of having failed to provide any check or barrier against the boom-and-bust cycle in the financial system. It was largely a bystander during the build-up of leverage and the erosion of credit standards in the credit boom and has been largely powerless as the boom has turned to bust with a devastating impact on the real economy. How did we reach this state of...

  • “Bad banks” must be big and mandatory

    Daniel Gros, 5 February 2009

    There is wide agreement that a recovery in bank lending is possible only if banks can get rid of the vast amounts of ‘toxic’ assets on their balance sheets. What makes these assets ‘toxic’ and not just ‘bad investments’? When a bank makes a big investment that goes bad, it has problems. But these are problems in which the financial system is well versed. The...

  • Restoring financial stability: How to repair a failed system

    Viral Acharya, Matthew Richardson, 7 February 2009

    As cracks in the financial system began to appear in early 2007, some of us at the NYU Stern School of Business began to vigorously debate all the issues. Some, like our colleague, Nouriel Roubini, had been forecasting trouble for a number of years. Living in the New York City and being at a major business school at the heart of the financial capital of the world, it was difficult not to become...

  • Liquidity insurance for systemic crises

    Enrico Perotti, Javier Suarez, 11 February 2009

    Funding opaque long-term assets with demand deposits creates rollover risk. This crisis has revealed that short term wholesale lenders are very prone to run, and that maturity mismatch accelerates fire sales and causes further liquidity calls (Brunnermeier, 2009). Basel capital requirements focus on individual banks’ asset risk, underplaying a classic maturity transformation risk. They...

  • Proposals to fix the financial system: A stocktaking

    Thomas Philippon, 15 February 2009

    The global crisis has scared the public, captivated policy makers, and fascinated the academic community. A consensus has emerged that the financial system is broken and must be fixed. This column puts forth an opinionated overview of the various reports and proposals for new financial regulations in an attempt to stimulate and focus discussion. I do not describe the crisis itself since much has...

  • How to fix the banks and launch a virtuous cycle

    Ricardo Caballero, 22 February 2009

    Hope is in short supply during these trying economic times. Nowhere is this clearer than in the financial system. Since Secretary Geithner’s announcements last week, shares of the main financial institutions have yet again imploded. To make matters worse, politics has decidedly entered into the process of economic-policymaking, which makes it all the more likely that we will end up with the...

  • The good/bad bank debate: A new proposal

    Robert E. Hall, Susan Woodward, 24 February 2009

    Policymakers continue to struggle to figure out how to turn a troubled bank into a good bank and a bad bank. Under the good-bank/bad-bank policy, the good bank will operate free from concerns about troubled assets, because these assets will be held by the fully independent bad bank. Most discussions of the separation of a bank in this way presume that the government must inject a lot of...

  • How to fix banks: Lessons from Sweden

    Lars Jonung, 14 March 2009

    The Swedish banking crisis was part of a major financial crisis that hit the Swedish economy in 1991-93. Its origin should be traced to financial liberalisation in the mid-1980s that triggered a rapid lending boom. The pegged exchange rate for the krona prevented monetary policy from mitigating the boom by means of interest rate increases. The boom turned into bust and crisis around 1990,...

  • Zombie solutions: The Good Bank vs Bad Bank approaches

    Willem Buiter, 14 March 2009

    The Good Bank solution differs significantly from the Bad Bank solution in its distributional implications, medium- and long-term incentive effects, and immediate impact on financial stability. The Bad Bank solution Under the Bad Bank approach, the authorities either purchase toxic assets from the banks that made the toxic investments/loans, or they guarantee (insure) these toxic assets. Toxic...

  • Recapitalising banks: The Caballero Plan

    Ricardo Caballero, 18 March 2009

    In a few weeks we will know the results of the stress tests. Rightly, the US Treasury and the Fed have pledged that these tests will not be used to liquidate or nationalise banks, but to determine the degree of support that each institution may need. Despite this pledge, the plan has not been favourably received by financial markets for essentially three related reasons: First, dilution of...

  • Securitisation undermined financial stability

    Hyun Song Shin, 18 March 2009

    Financial booms and busts are as old as finance itself, but the current global financial crisis has the distinction of being the first post-securitisation crisis. Securitisation refers to banks’ practice of parcelling and selling loans to other investors. Securitisation was meant to disperse risks associated with bank lending so that deep-pocketed investors who were better able to absorb...

  • Amidst crisis, banks are still paying dividends

    Viral Acharya, Hyun Song Shin, Irvind Gujral, 30 March 2009

    The accumulated losses in the current crisis (at $1.11 trillion since August 2007) have been very large, but so have the headline figures for the amount of new capital raised ($900 billion) as can be seen in Figure 1. However, a closer look at the numbers reveals a much less sanguine picture of the state of the banking sector and raises serious questions about governance of the banking sector...

  • Making sense of Obama’s bank reform plans

    Viral Acharya, Matthew Richardson, 24 January 2010

    In what has constituted a surprise for most in industry, policy and academic circles, the Obama administration has proposed sweeping changes to the financial sector regulation going forward. Obama’s two-part plan First, The Obama administration is planning to charge banks a fee related to the costs of the government bailout of the financial industry. The fee is expected to raise $117...

  • My unanswered questions on bank regulations

    Per Kurowski The Voice and Noise Foundation and Petropolitan A.C., 25 September 2011

    Here follows several questions, not all, that I have posed over the years to bank regulators and other experts on the subject of bank regulations, at the IMF, at the World Bank, there even as an Executive Director (2002-2004), and many other places, and which have not received answers… and worse which are not even allowed to become part of the debate. 1. If we know that a truly large and...

  • The fallacy of Financial Regulation—neglect of the Shadow Banking System

    Michael Pomerleano The World Bank, 31 May 2011

      The message of this article is straightforward. In response to the crisis, the reforms in financial regulation address threats to the banking system by increasing capital and providing for liquidity in the banking system. This article argues that the measures miss the point of the recent crisis. The liquidity crisis in the shadow banking system was a major source of financial and economic...

  • The SDR solution

    Michael Pomerleano The World Bank, 5 May 2011

      There is universal agreement that the international monetary system (IMS) needs reform. All of us understand the benefits of avoiding the Triffin Dilemma by reforming the international financial system. The present system, dominated by reserves holdings of US dollars, places an unsustainable burden of creating reserves on the US. While the US enjoys the "exorbitant privilege" of...

  • Basel‘s Monstrous Regulatory Mistake

    Per Kurowski The Voice and Noise Foundation and Petropolitan A.C., 20 April 2011

    The Basel Committee made a monstrous regulatory mistake in Basel II, when they considered the credit ratings of the clients of the banks when setting the capital requirements for banks, even though the information provided by the credit ratings was already being considered by the market and the banks when setting their risk-premiums and interest rates.   Even if the credit ratings had been...

  • The European restructuring should not be “too” easy *

    Michael Pomerleano The World Bank, 20 December 2010

      A chorus of respected analysts is voicing pessimism about the future of the euro and the European Union. Dani Rodrik writes about Thinking the Unthinkable in Europe. Barry Eichengreen comments on Europe’s Inevitable Haircut. Daniel Gros, in Big bang or endless crisis? argues for a big-bang solution to the eurozone’s problems. Ken Rogoff in The Euro at Mid-Crisis outlines an...

  • Private Lessons for Public Banking

    7 February 2009

    Viral Acharya and David Backus NYU Stern School of Business Background As we work our way through the current financial crisis, central banks have shifted their attention from managing short-term interest rates to providing liquidity to the financial system. In the US, for example, the Federal Reserve's balance sheet has expanded rapidly, as it offered funds to banks and accepted securities in...

  • US needs a special Chapter 11 for big banks

    2 February 2009

    From: Edward Altman and Thomas Philippon Editors’ note: This is the Executive Summary of a chapter written for the Stern School’s  NYU Stern White Papers Project “Restoring Financial Stability: How to Repair a Failed System” which will be published as a book in March 2009. Where Should the Bailout Stop?           ...

  • Fixing corporate governance & compensation in the financial sector

    2 February 2009

    From: Viral V. Acharya, Jennifer Carpenter, Xavier Gabaix, Kose John, Matthew Richardson, Marti Subrahmanyam, Rangarajan Sundaram and Eitan Zemel. Editors’ note: This is the Executive Summary of a chapter written for the Stern School’s  NYU Stern White Papers Project “Restoring Financial Stability: How to Repair a Failed System” which will be published as a book in...

  • The Singularity of Banks

    19 March 2009

    The pressure to suspend competition policy enforcement in banking is formidable. In Britain, the government blocked a referral of the HBOS-Lloyds TSB merger to the national competition commission, on the grounds that the stability of the U.K. financial system was an overriding concern. The French, German and other governments have complained that the European Commission is slow in approving bank-...

  • The Credit Strike and the Need for Reform

    16 February 2009

    The credit crunch has given way to the credit strike. Despite exhortations by the government, substantial public stakes in banks and strengthened loan guarantee schemes, UK banks are refusing to lend to business. While it was the trade unions that brought the country to its knees in the 1970’s, it is now the banks that threaten the future of the British economy. It took...

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