Ten years after the outbreak of the global financial crisis, banks in the euro area have not recovered. The Euro Stoxx Financials is 65% below the pre-crisis peak, whereas the S&P Financials has come close to the pre-crisis level. The different fate of financial institutions is due to different monetary and regulatory crisis therapies of the European Central Bank (ECB) and the Fed. Continue reading
by Taiki Murai and Gunther Schnabl[*]
In the second half of the 1980s, 13 Japanese city banks climbed into the group of the world’s largest banks, boosted by a domestic speculation boom. With the bursting of the Japanese financial “bubble” in the early 1990s, a gradual decline followed. Since then, the Japanese city banks have been driven by Japanese monetary policy into a concentration process, which has produced new giants without increasing efficiency. Continue reading
Since 2009, the role of government in banking has increased substantially in Europe. This is, first, a consequence of capital injections or bailouts of private banks (for instance Dexia in Belgium, Royal Bank of Scotland in the UK, Hypo Real Estate and Commerzbank in Germany, Fortis in the Benelux, ABN Amro in the Netherlands, or Allied Irish Bank in Ireland). Second, the ECB has taken on a more dominant role in financial markets. And third, low-interest rates and mounting EU regulation seem to discourage private bank lending. Whereas private banks de-leverage and roll back their portfolios in the absence of great opportunities, so-called development banks substantially gain market share. This is odd and worrisome at the same time.
by Jerry O’Driscoll
The following is a book review from the Cato Journal, Vol. 30, No. 3 (Fall 2010).
Jimmy Stewart Is Dead: Ending the World’s Ongoing Financial Plague with Limited Purpose Banking Laurence J. Kotlikoff (Hoboken, N.J.: John Wiley & Sons, 2010, 241 pp.)
Chapter 1 of the book is titled “It’s a Horrible Mess,” and in it Laurence Kotlikoff, a professor of economics at Boston University, reminds the reader of the breadth, depth, and horror of the global financial crisis. It is a cure for the dispassionate observer of events, an indictment that would send all but those with ice water in their veins to sign up for the Tea Party Express. The book is a particularly well-written account of the crisis that begins in housing finance, spreads throughout the financial system, and then throughout the real economy. The crisis hit in tsunami-like waves beginning in 2007 and continued into 2009.
In Kotlikoff’s words, “We thought we had well-functioning banking and insurance companies with competent directors, world-class managers, responsible regulators, and incorruptible rating companies. But overnight, we it learned it was a sham.” Continue reading
by Mario Rizzo
This is your final exam.
Question: Suppose you are a profit-maximizing bank, which course of action do you take: (a) Lend $1 million to Herman Dilbert’s Chicken Finger Brasserie or (b) Buy $1 million in 10 year 3.5% Treasuries?
Answer under the fold. Continue reading