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"Banking Crisis"
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Unfinished business : the unexplored causes of the financial crisis and the lessons yet to be learned
A penetrating critique tracing how under-regulated trading between European and U.S. banks led to the 2008 financial crisis-with a prescription for preventing another meltdown There have been numerous books examining the 2008 financial crisis from either a U.S. or European perspective. Tamim Bayoumi is the first to explain how the Euro crisis and U.S. housing crash were, in fact, parasitically intertwined.
Book
The Use of Blanket Guarantees in Banking Crises
In episodes of significant banking distress or perceived systemic risk to the financial system, policymakers have often opted for issuing blanket guarantees on bank liabilities to stop or avoid widespread bank runs. In theory, blanket guarantees can prevent bank runs if they are credible. However, guarantee could add substantial fiscal costs to bank restructuring programs and may increase moral hazard going forward. Using a sample of 42 episodes of banking crises, this paper finds that blanket guarantees are successful in reducing liquidity pressures on banks arising from deposit withdrawals. However, banks' foreign liabilities appear virtually irresponsive to blanket guarantees. Furthermore, guarantees tend to be fiscally costly, though this positive association arises in large part because guarantees tend to be employed in conjunction with extensive liquidity support and when crises are severe.
eBook
Crisis Resolution and Bank Liquidity
What is the effect of financial crises and their resolution on banks' choice of liquidity? When banks have relative expertise in employing risky assets, the market for these assets clears only at fire-sale prices following a large number of bank failures. The gains from acquiring assets at fire-sale prices make it attractive for banks to hold liquid assets. The resulting choice of bank liquidity is countercyclical, inefficiently low during economic booms but excessively high during crises. We present evidence consistent with these predictions. While interventions to resolve banking crises may be desirable ex post, they affect bank liquidity in subtle ways: Liquidity support to failed banks or unconditional support to surviving banks reduces incentives to hold liquidity, whereas support to surviving banks conditional on their liquid asset holdings has the opposite effect.
Journal Article
Recovery from Financial Crises: Evidence from 100 Episodes
We examine the evolution of real per capita GDP around 100 systemic banking crises. Part of the costs of these crises owes to the protracted nature of recovery. On average, it takes about 8 years to reach the pre-crisis level of income; the median is about 6.5 years. Five to six years after the onset of crisis, only Germany and the United States (out of 12 systemic cases) have reached their 2007-2008 peaks in real income. Forty-five percent of the episodes recorded double dips. Post-war business cycles are not the relevant comparator for the recent crises in advanced economies.
Journal Article
Failure and Rescue in an Interbank Network
This paper is concerned with systemic risk in an interbank market, modelled as a directed graph of interbank obligations. This builds on the modelling paradigm of Eisenberg and Noe [Eisenberg L, Noe TH (2001) Systemic risk in financial systems.
Management Sci.
47(2):236-249] by introducing costs of default if loans have to be called in by a failing bank. This immediately introduces novel and realistic effects. We find that, in general, many different clearing vectors can arise, among which there is a greatest clearing vector, arrived at by letting banks fail in succession until only solvent banks remain. Such a collapse should be prevented if at all possible. We then study situations in which consortia of banks may have the means and incentives to rescue failing banks. This again departs from the conclusions of the earlier work of Eisenberg and Noe, where in the absence of default losses there would be no incentive for solvent banks to rescue failing banks. We conclude with some remarks about how a rescue consortium might be constructed.
This paper was accepted by Wei Xiong, finance.
Journal Article
Interbank Liquidity Crunch and the Firm Credit Crunch: Evidence from the 2007-2009 Crisis
We study the credit supply effects of the unexpected freeze of the European interbank market, using exhaustive Portuguese loan-level data. We find that banks that rely more on interbank borrowing before the crisis decrease their credit supply more during the crisis. The credit supply reduction is stronger for firms that are smaller, with weaker banking relationships. Small firms cannot compensate the credit crunch with other sources of debt. Furthermore, the
impact of illiquidity on the credit crunch is stronger for less solvent banks. Finally, there are no overall positive effects of central bank liquidity, but higher hoarding of liquidity.
Journal Article