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Balancing the Banks

Balancing the Banks: Global Lessons from the Financial Crisis

Translated by Keith Tribe
Copyright Date: 2010
Pages: 160
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  • Book Info
    Balancing the Banks
    Book Description:

    The financial crisis that began in 2007 in the United States swept the world, producing substantial bank failures and forcing unprecedented state aid for the crippled global financial system. Bringing together three leading financial economists to provide an international perspective,Balancing the Banksdraws critical lessons from the causes of the crisis and proposes important regulatory reforms, including sound guidelines for the ways in which distressed banks might be dealt with in the future.

    While some recent policy moves go in the right direction, others, the book argues, are not sufficient to prevent another crisis. The authors show the necessity of anadaptiveprudential regulatory system that can better address financial innovation. Stressing the numerous and complex challenges faced by politicians, finance professionals, and regulators, and calling for reinforced international coordination (for example, in the treatment of distressed banks), the authors put forth a number of principles to deal with issues regarding the economic incentives of financial institutions, the impact of economic shocks, and the role of political constraints.

    Offering a global perspective,Balancing the Banksshould be read by anyone concerned with solving the current crisis and preventing another such calamity in the future.

    eISBN: 978-1-4008-3464-8
    Subjects: Finance

Table of Contents

  1. Front Matter
    (pp. [i]-[iv])
  2. Table of Contents
    (pp. [v]-[vi])
  3. Acknowledgments
    (pp. [vii]-[x])
  4. CHAPTER 1 Introduction
    (pp. 1-9)
    Mathias Dewatripont, Jean-Charles Rochet and Jean Tirole

    The recent financial crisis was a mix of “unique” and much more conventional events. This short book offers our perspective on what happened and especially on the lessons to be learned in order to avoid a repetition of this large-scale meltdown of financial markets, industrial recession, and public deficits. Chapter 2 provides a diagnosis of what went wrong and discusses some key financial regulation reforms. Chapter 3 takes a more detailed look at the flaws in the prudential framework that was in place when the crisis erupted and at the required remedies, and chapter 4 focuses on the treatment of...

  5. CHAPTER 2 Lessons from the Crisis
    (pp. 10-77)
    Jean Tirole

    This chapter aims to contribute to the debate on financial system reform. In the first part I describe what I perceive to be a massive regulatory failure, a breakdown that goes all the way from regulatory fundamentals to prudential implementation. Although there has been some truly shocking behavior in the world of finance, the universal denunciation of “financial madness” is pointless. Managers and employees in the financial industry, like all economic agents, react to the information and incentives with which they are presented. Bad incentives and bad information generate bad behavior. Accordingly, this chapter starts by listing the principal factors...

  6. CHAPTER 3 The Future of Banking Regulation
    (pp. 78-106)
    Jean-Charles Rochet

    The Basel Committee on Banking Supervision was created in 1974 on the initiative of the Group of Ten, following the collapse of the German bank Herstatt.¹ Its purpose is to lay down prudential rules applicable to all banks that have a significant international presence. During the 1980s, some members of the committee (especially American and British representatives) were concerned about the frenetic increase in the total assets of Japanese banks, banks that were notoriously undercapitalized and enjoyed an implicit guarantee from the Japanese government in case of failure. In 1988, the committee formulated a set of prudential rules aimed at...

  7. CHAPTER 4 The Treatment of Distressed Banks
    (pp. 107-130)
    Mathias Dewatripont and Jean-Charles Rochet

    The recent financial crisis has been multidimensional, and it has already prompted a number of analyses and policy-oriented documents.¹ This book is academic in nature, and therefore tends to emphasize principles rather than details of practical implementation. Moreover, our focus in this chapter is on the treatment of distressed banks—a key element of the regulatory architecture that has so far attracted little attention. The treatment of distressed banks cannot be dealt with in isolation from other dimensions of this architecture, however. Hence some of our recommendations will indirectly address the contextual aspect.

    This chapter is concerned with potential measures...

  8. References
    (pp. 131-136)
  9. Index
    (pp. 137-138)