dewatripont - balancing the banks; global lessons from the financial crisis (2010)

[...]... Brothers) Consequently, the argument behind the representation hypothesis still holds: even if the debtholders of banks are neither small nor inexperienced, the fact that their deposits are short term means that when they expect trouble, running is the best strategy The danger of a bank run for the banking system as a whole then typically prompts the authorities to support endangered institutions The. .. to cross-border mergers) On the one hand, these trends have significantly increased the domestic lobbying power of financial institutions, thereby giving more prominence to a laissez-faire approach On the other hand, globalization in a world of hard-to-coordinate international regulatory policies has increased the lag between private-sector developments and regulatory responses Taken together, these factors... position of the so-called super-senior debt, which they either held directly or insured Second, buyers of these securitized loans made their purchases without paying much attention to their quality Presumably, the fact that the loans were not retained by the original lender should have given the buyers a hint of the likely quality of these loans But buyers had little incentive to monitor the quality... to the excess of international savings as the cause of excess liquidity in the U.S economy before the subprime mortgage crisis 16 • Chapter 2 borrowing extremely cheap Low short-term rates sow the seeds of a potential crisis through multiple channels: First, they lower the overall cost of capital and thereby encourage leverage Second, they make short-term borrowing relatively cheap compared to long-term... by the mortgage loan during the process of securitization The FDIC proposed that the government should underwrite the losses suffered by lenders provided, among other conditions, that the renegotiation resulted in the borrowers’ not spending more than 31 percent of their income on mortgage payments Lessons from the Crisis • 19 Excessive Securitization Although lenders had traditionally retained the. .. vary from country to country, the removal of interest-rate controls promoted competition at first In the turbulent macroeconomic environment of the 1970s and 1980s, though, this form of deregulation, together with an interest-rate maturity mismatch in a period of rising interest rates, resulted in the 1980s in a large-scale banking crisis in the United States (the savings and loan—S&L crisis) This crisis. .. they can show that their risks are “limited,” as an outcome of lobbying by these banks The assessment of risk under the new regulations comes from the banks themselves, through “internal models”—which represents a step toward self-regulation The complexity of these internal models can make it very hard for supervisors to verify what is being computed and raises con- Introduction • 3 cern, despite the. .. led to a mix of further deregulation and reregulation On the one hand, diversification of activities was allowed in order to reduce the specializationinduced fragility of the S&Ls S&Ls had used short-term savings deposits to fund long-term, fixed-rate mortgages, and were thereby exposed to yield-curve risk On the other hand, in order to limit the exposure of deposit insurance funds, the regulation of... (source: Reuters) Lessons from the Crisis • 23 loans to firms As has long been recognized, this maturity transformation creates hazards for the financial sector If short-term borrowing is not rolled over, then the banks’ liquidity dries up, and the banking system finds itself in trouble This is especially the case if the bank’s creditors panic and seek to withdraw their deposits for fear that the bank might... could have saved tens of thousands of dollars in the last decade if they had ARMs.” Adjustable-rate mortgages made up 28 percent of mortgages in January 2004 in the United States 9 These data are taken from Shiller (2009, 5, 36) Lessons from the Crisis • 15 a savings glut—expanding the set of borrowers and reducing margins on conforming loans A strength of the U.S financial system is that it creates large . class="bi x0 y0 w0 h1" alt="" BALANCING THE BANKS This page intentionally left blank BALANCING THE BANKS Global Lessons from the Financial Crisis MATHIAS DEWATRIPONT, JEAN-CHARLES ROCHET, AND JEAN. Cataloging-in-Publication Data Dewatripont, M. (Mathias) Balancing the banks : global lessons from the fi nancial crisis / Mathias Dewatripont, Jean-Charles Rochet, and Jean Tirole ; translated by Keith. reduce the specialization- induced fragility of the S&Ls. S&Ls had used short-term sav- ings deposits to fund long-term, fi xed-rate mortgages, and were thereby exposed to yield-curve