Financial regulation
Pre-crash financial regulation
Governments have long been aware of the danger that a loss of confidence following the failure of one bank could lead to the failure of others, and to limit that danger they traditionally required all banks to maintain minimum reserve ratios. Following the crash of 1929 they also imposed restrictions upon the activities of the commercial banks. In the United States, for example, the Glass-Steagall Act prohibiting their participation in the activities of investment banks. In the 1980s, however, there was a general move toward "deregulation", those restrictions were dropped, reserve requirements were relaxed, and there followed a period of financial innovation and substantial change in the nature of banking[1]. The perception of a resulting increase in danger of systemic failure led, in 1988, to the publication of a set of regulatory recommendations that related a bank's required reserve ratio to the riskiness of its loans [2] and, in 2004, to revised recommendations [3] requiring banks to take more detailed account of the riskiness of their loans. The
During the eighteen-month period between the middle of 2007 and the end of 2008 the "crash of 2008" resulted in the failure or enforced rescue of fifteen major banks, three of the world's largest mortgage-lenders and one of the world's largest insurance companies [4], a disaster that has been attributed to risk-management errors on the part of the banks and the principal credit-rating agencies [5] and to inaction on the part of the regulatory authorities. The investments whose riskiness had been wrongly assessed were derivatives based upon mortgages in the United States housing market [6]. In 2007, an international banking panic was triggered by the revelation of serious problems at a major United States bank stemming from its holdings of such derivatives, and in 2008 an international "credit crunch" was generally attributed to a loss of mutual confidence among banks that was prompted by the unexpected failure of the United States authorities to save the Lehman Brothers bank from bankruptcy. According to the Bank of England "The global banking system experienced its most severe instability since the outbreak of World War I" [7].
(The article on bank failures and rescues lists the major bank failures and banking crises from the end of the first world war and the crash of 2008)
Post-crash proposals
[8].
[9].
[10].
The authorities' reactions
[12]; and in a 2005 lecture, Jean-Claude Trichet, the President of the European Central Bank, argued that not all bubbles threaten financial stability, and that if policy-makers attempted to eliminate all risk from the financial system, they either fail or they would "hamper the appropriate functioning of a market economy"[13]. [14], and by Federal Reserve Board Governor Frederic Mishkin [15]
Policy decisions
References
- ↑ Claudio Borio and Renato Filosa: The Changing Borders of Banking, BIS Economic Paper No 43, Bank for International Settlements December 1994
- ↑ The Basel Capital Accord (Basel I) Basel Committee for Banking Supervision 1988
- ↑ Revised International Capital Framework, (Basel II) Basel Committee on Banking Supervision 2006
- ↑ For a list of the affected companies see the timelines subpage of the article on the crash of 2008 [1]
- ↑ For an account of some possible sources of risk-management errors, see the tutorials subpage of the article on the crash of 2008 [2]
- ↑ See the article on the subprime mortgage crisis
- ↑ Overview of the November Inflation Report, Bank of England 2008
- ↑ Asset Prices and the Business Cycle, World Economic Outlook, Chapter 3, International Monetary Fund, May 2000
- ↑ Lessons for Monetary Problems from Asset Price Fluctuations, (World Economic Outlook October 2009 Chapter 3) International Monetary Fund 2009
- ↑ The Warwick Commission on International Financial Reform: In Praise of Unlevel Playing Fields, (The report of the second Warwick Commission) University of Warwick, November 2009
- ↑ The Role of Macroprudential Policy, a discussion paper, Bank of England, November 2009
- ↑ Ben Bernanke: Asset-Price "Bubbles" and Monetary Policy (Speech to the New York Chapter of the National Association for Business Economics, New York, New York, October 15 2002) Federal Reserve Board 2002
- ↑ Jean-Claude Trichet: Asset price bubbles and monetary policy,(Mas lecture, 8 June 2005) European Central Bank, 2005
- ↑ Mark Carney, Governor of the Bank of Canada: Some Considerations on Using Monetary Policy to Stabilize Economic Activity, (Speech to the Foreign Policy Association, New York, 19 November 2009)Bank for International Settlements, 2009
- ↑ Frederic Mishkin: How Should We Respond to Asset Price Bubbles, Board of Governors of the Federal Reserve System, October 2008