Rocky Times

Rocky Times: New Perspectives on Financial Stability

YASUYUKI FUCHITA
RICHARD J. HERRING
ROBERT E. LITAN
Copyright Date: 2012
Pages: 160
https://www.jstor.org/stable/10.7864/j.ctt126358
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  • Book Info
    Rocky Times
    Book Description:

    It has been nearly four years since the financial crisis of 2008, and the global financial system still is experiencing malaise caused by high rates of unemployment; a lingering, unresolved supply of foreclosed properties; the deepening European debt crisis; and fear of a recurrence of the bank turmoil that brought about the Great Recession. All of these factors have led to stagnant economic growth worldwide.

    InRocky Times, editors Yasuyuki Fuchita, Richard Herring, and Robert E. Litan bring together experts from academia and the banking system to analyze the difficult issues concerning troubled large financial institutions in an environment of economic uncertainty and growing public anger. Continuing the format of the previous Brookings-Nomura collaborations,Rocky Timesfocuses largely on developments within the United States and Japan but looks at those in other nations as well.

    This volume focuses on two broad areas: the Japanese approach to regulating financial institutions and promoting financial stability and the U.S. approach in light of the Dodd-Frank legislation. Specific topics include "Managing Systemwide Financial Crises: A Macro Approach -Some Lessons from Japan since 1990," "The Case for Properly Designed Contingent Capital Instruments," and "The Bankruptcy of Bankruptcy."

    eISBN: 978-0-8157-2251-9
    Subjects: Finance, Economics, Business

Table of Contents

  1. Front Matter
    (pp. i-iv)
  2. Table of Contents
    (pp. v-vi)
  3. Preface
    (pp. vii-viii)
  4. 1 Introduction
    (pp. 1-10)
    YASUYUKI FUCHITA, RICHARD J. HERRING and ROBERT E. LITAN

    Recovery remains weak from the Great Recession, arguably the worst financial crisis since the Great Depression, which quickly spread from its origins in the United States to much of the rest of the world. Over-leveraged consumers have been hesitant to spend, while over-leveraged banks have been too weak to lend. It will take time, perhaps a very long time, for economies that entered the crisis in such precarious financial condition to heal and for strong, sustained growth to take hold.

    In the United States, the Financial Crisis Inquiry Commission, the official body charged with investigating the causes of the crisis,...

  5. 2 Managing Systemwide Financial Crises: Some Lessons from Japan since 1990
    (pp. 11-58)
    YASUYUKI FUCHITA and KEI KODACHI

    Because no international resolution regime for large and complex crossborder financial firms has been established, doubts are often expressed over whether the orderly liquidation stipulated in Title II of the Dodd-Frank Act can be achieved as intended. This chapter emphasizes that pursuing orderly liquidation without using taxpayer money itself acts as a barrier to reaching global agreement on such a regime.

    Some argue that financial firms need to modify their lines of business and organizational structure to give them higher resolvability. We doubt, however, that supervisory authorities can actually force financial firms to make major changes to their business and...

  6. 3 The Bankruptcy of Bankruptcy
    (pp. 59-88)
    GAVIN BINGHAM

    A legal entity, whether a person or company, is bankrupt when it cannot make all payments due, on time and in full. A legal construct is bankrupt when it fails to achieve its political, social, or economic objectives. The thesis of this chapter is that bankruptcy as a legal device for resolving the financial condition of systemically important financial institutions (SIFIs) and insolvent states is bankrupt.¹ The international financial crisis that started in 2007 has demonstrated that there is no effective means for resolving the financial distress of SIFIs. As a result, the financial industry, which accounts for only about...

  7. 4 The Case for Regulating the Shadow Banking System
    (pp. 89-116)
    MORGAN RICKS

    The title of this chapter raises at least two questions. First, what is meant by “shadow banking”? Second, what is meant by “regulate”? Neither question has an obvious answer. This chapter uses the term “shadow banking” to refer to a specific activity:maturity transformationthat takes place outside the depository banking sector. “Maturity transformation” simply denotes the issuance of fixed-principal, very short-term IOUs, with the proceeds invested in longer-term financial assets (typically credit assets). This activity is, of course, the traditional domain of depository banking. The shadow banking system performs virtually the same function, but its short-term IOUs are not...

  8. 5 Why and How to Design a Contingent Convertible Debt Requirement
    (pp. 117-162)
    CHARLES W. CALOMIRIS and RICHARD J. HERRING

    Although debates still rage over the causes of the financial crisis of 2007–09, one thing is clear: several of the world’s largest financial institutions—including Fannie Mae, Freddie Mac, Citigroup, UBS, AIG, Bear Stearns, Lehman Brothers, and Merrill Lynch—had amassed huge and concentrated credit and liquidity risks related to subprime mortgages and other risky investments, but they maintained equity capital that was too small to absorb the losses that resulted from those risky investments. In other words, relative to risk, equity capital proved inadequate to insulate these firms, and many others, from insolvency when their risks were realized.¹...

  9. 6 Governance Issues for Macroprudential Policy in Advanced Economies
    (pp. 163-212)
    DOUGLAS J. ELLIOTT

    The recent severe financial crisis is leading policymakers around the world to adopt a new set of tools to manage their nation’s economy. Authorities may be able to cushion the blow from dangerous financial crises by using a “macroprudential” approach that fits between monetary policy for the economy as a whole and traditional regulation of individual financial institutions (now referred to as “microprudential” regulation to distinguish it from the new approach). There are multiple definitions of “macroprudential,” but the core concept is to manage factors that could endanger the financial system as a whole even if it would not be...

  10. Contributors
    (pp. 213-214)
  11. Index
    (pp. 215-222)
  12. Back Matter
    (pp. 223-224)