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Author(s):
Tamim Bayoumi
Published Date:
October 2017
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Notes

Introduction: The Needle (and the Damage Done)

A central argument of this book is that the 2008–09 US financial crisis and the 2008–12 Euro area crisis were joined at the hip, hence the descriptor the North Atlantic crisis.

“National reputation hangs on IKB rescue”, Financial Times, August 2, 2007.

Measured using the FTSEurofirst 300 index.

The exceptions are Greece and Ireland, where the IMF estimates provide implausibly small losses in output. For Greece, I simply assume the cost of the crisis was 30 percent of output, slightly larger than the equivalent figure for Portugal, and in Ireland I assume 5 percent of GDP rather than the positive number implied by IMF estimates.

For a discussion of the spillovers from the United States see IMF (2011).

For example, they are close to the “low” scenario reported in Cline (2017), Chapter 2.

For a useful discussion and comparison see Cline (2017), Chapter 2.

It has often ben remarked that no major bankers were prosecuted after the crisis, but just as striking is that no financial experts lost their jobs. One possible exception is Shelia Blair of the US Federal Deposit Insurance Corporation, who resigned at the end of her term in 2011. She, of course, was a fierce critic of Wall Street and a woman to boot.

In the United Kingdom, two major banks (Royal Bank of Scotland and Lloyds) had to be rescued and Barclays came under major stress; in Switzerland, the largest bank, UBS, also required government support. Both countries have interesting, if somewhat different, stories. The problems of UBS came from their major presence in the US markets, and hence is a case of US financial spillovers onto an otherwise sound banking system. The UK case is in many ways the opposite, a homegrown crisis with only limited dalliance in US markets except for Barclays bank.

For example, Wolf (2014) and King (2016)

A similar view on the United Kingdom is provided by Haldane (2009).

1 European Banks Unfettered

Laeven and Valencia (2012), Table 1. The crises were assessed as systemic, except in the cases of France, Italy, and Portugal.

Merler and Véron (2015) report that banking made up 88 percent of financing in Europe, versus 30 percent in the United States.

The nationalizations were partially reversed by the incoming right-wing government of Jacques Chirac, although the banking system was not fully privatized until 2002 (Plessis, 2003).

European Council Directive 88/361/EEC. Ireland, Portugal and Spain were allowed to maintain temporary restrictions, mainly on short-term movements, until 31 December 1992, and for Greece the deadline was 30 June 1994. As a safeguard, the directive included a clause enabling member states to take protective measures if short-term capital movements of exceptional size seriously disrupted the conduct of monetary policy, but the transition went smoothly and no country used the option. As a result, capital controls and the associated barriers to European-wide banking became a thing of the past in the European Union by the early 1990s.

European Central Bank (2000) has a detailed discussion.

While there was a modest increase in the fiscal responsibilities of the European Union, fiscal policy remained overwhelmingly at the national level.

James (2012), pp. 313–17.

It presumably also reflected lobbying by the national regulators who, like most institutions and people, preferred to retain their jobs.

In the final text, Article 105.5 of the Treaty stated that “The ESCB shall contribute to the smooth conduct of policies pursued by the competent authorities relating to the prudential supervision of credit institutions and the stability of the financial system” (emphasis added).

Basel Committee on Banking Supervision (2007). See also Goodhart (2011) who provides a detailed history of the Committee’s actions from 1974 to 1997.

Ibid., p. 45.

Goodhart (2011), Chapter 6, provides a detailed discussion of this process.

Ibid., paragraph 3.

Off-balance-sheet items were first given a “conversion factor” which translated then into the equivalent on-balance-sheet risk and then were assigned to the on-balance-sheet risk buckets.

Goodhart (2011), pp. 247–9.

This issue was further confounded by the inability to reach agreement on uniform capital rules for market risk with the International Organization of Securities Commissions (IOSCO), which covered the US investment banking houses. The European universal banks were thus under a different regime for safety and soundness than the US investment banks, providing ample opportunities for requests to lower standards so as to provide a more level playing field.

Goodhart (2011), Chapter 7, Appendix J. The exact quote is that “roughly 7 to 10 of 15 banks produced estimates of risk within a range of plus or minus 25 percent of the median estimate”.

Greenspan (2008), pp. 372–3.

Branches were a more popular method of entry in the southern countries than in the northern core.

An additional underlying factor was the information technology revolution, which tended to favor large banks with widespread operations over small banks with local knowledge.

The vertical axis shows the ratio of the book value of equity to total assets, the horizontal axis the ratio of Tier 1 capital to risk-weighted assets.

2 US Shadow Banks Unleashed

For example Johnson and Kwak (2011). My analysis is based on longer historical over-views of US financial deregulation, such as Kroszner and Strahan (2014) and (for a more jaundiced view) Sherman (2009).

The Emergency Home Finance Act allowed Freddie and Fannie to buy and sell mortgages not insured or guaranteed by the federal government.

Over time, the caps on lending rates were gradually eliminated by a combination of favorable legal decisions, regulatory competition across states, and lower inflation. The major legal step was the 1978 Supreme Court ruling that the National Banking Act allowed a bank to charge up to the maximum rate allowed by its home state regardless of the location of the borrower. This created incentives for states to raise or eliminate the caps on interest rates so as to make their banks more competitive, particularly in the much less geographically constrained credit card business. Delaware and South Dakota were the first to eliminate their usury laws altogether, leading to a rapid expansion in their banks’ credit card business. By 1988 a further 18 states had removed all restrictions. Elsewhere, the reduction in inflation in the 1990s made usury laws much less important except as regards extremely high-risk loans. By this time, however, the transfer of loans to the shadow banking system as a result of the simple leverage ratio was well underway.

Haltom (2013) provides more detail.

Federal Deposit and Insurance Corporation (1997a) contains for a detailed description.

In addition, the act reduced the incentives for insured banks to take risks by introducing risk-based deposit insurance charges and the incentives to widen bailout to include non-insured creditors by directing the Federal Deposit Insurance Corporation to resolve a bank in the least costly way to the insurance fund.

In an important legal ruling, automatic teller machines were ruled to not constitute bank branches, allowing them to be set up without regard to rules on the location of bank offices.

There are also separate regulators for credit unions and, before 2010, thrifts.

Moseby (2016).

Their origins lay in financing physical trade. Merchants would accept money from investors in return for providing a portion of the profits from the voyage assuming the ship and its cargo arrived safely. Investment banks would accept such paper at a discount that reflected the uncertainties involved in the voyage. From the start, they were heavily involved in making markets work.

For discussions and definitions of the shadow banking system see Pozsar and others (2013), Adrian and Shin (2009), and Adrian and Ashcraft (2012).

A famous early exposition is Lewis (1989).

See Edwards (1999) for more on hedge funds.

Ibid.

Of the three main rating agencies (S&P, Moody’s, and Fitch), one looked only at the likelihood of default and not at the amount of money that could be recovered should the security default, another took both default and losses into consideration, while the last focused on loss given default. These methodologies are easily available on their web sites.

The repo data include federal funds transactions, but since these were lent at a penalty rate it can be assumed the vast majority of the funds are private repos.

3 Boom and Bust

In addition, the core northern European banks expanded into other regions and businesses, such as Eastern Europe and trade credit. This development helped spread the impact of the subsequent North Atlantic financial bust to the rest of the world.

Securities and Exchange Commission (2003b). As preparation for this in March 2003 the SEC had issued a Final Rule that delegated the authority to “expand the categories of permissible collateral” for such repos to the Director of the Division of Market Regulation (Securities and Exchange Commission, 2003a, Section IIIA).

It also extended safe haven status to other collateralized loans such as swaps, in which banks “swapped” interest payments on loans linked to interest rates of different maturities (e.g., 3-month and 1-year rates) or in different currencies.

Basel Committee on Banking Supervision (2005a and 2005b). Regulations on covered bonds were also modernized. Covered bonds, mainly used by European banks, were bonds that were backed by specific loans on a bank’s balance sheet, which meant that they would pay out even if the bank went bankrupt as long as the borrowers of the loans continued to pay.

Kiff and Mills (2007) discuss mortgage originations and Justiniano, Primiceri, and Tambalotti (2016) discuss the dynamics of mortgage-backed asset spread.

Mayer, Pence and Sherlund (2009) and Amromin and Paulson (2010) discuss the deterioration in subprime loans over time.

Mortgage loans attracted a risk weight of 50 percent while mortgage-backed securities had a weight of only 20 percent.

McDonough laid out three rationales for such a review. In the face of more intense competition, arbitrage strategies were undermining the value of Basel 1; that capital adequacy rules should be supplemented by supervision and market discipline; and the need to attend to operational risk from unlikely but major shocks. Tarullo (2008), pp. 91–2.

While the preamble to the proposal advocated a three-pillar approach, comprising capital rules, supervision, and market discipline, the Committee’s work was and would continue to be focused on capital rules.

The biggest rise in capital occurred when using the foundation internal risk-based model, implying little or no incentive for banks using the standard approach to adopt this model. On the other hand, the advanced approach produced the smallest increase in overall capital charges, with a fall in capital for credit risk more than offsetting additional charges for operational risk.

In addition, the Committee started coming under pressure from politicians, including, for example, German concerns over the risk weights for small- and medium-sized enterprises.

On the way to the final rule a third consultative paper was released but it did not contain any fundamental changes in course.

The Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, and the Office of Thrift Supervision (2006).

The 15 percent figure involved weighting banks by their capital, which put more weight on banks with large capital buffers.

Summary section of the report.

The Basel study aggregated results for QIS-4 and QIS-5, and adjusted the results for QIS-4 by the new 1.06 scaling factor for internal-ratings-based capital requirements (this scaling factor was not included in the US agencies’ report).

Financial Services Agency (2005).

Quoted in Alford (2010).

In the words of Alan Greenspan, testifying to the US Congress in October 2008: “I made a mistake in presuming that the self-interest of organizations specifically banks and others were such that they were best capable of protecting their own shareholders.”

Tarullo (2008) and Herring (2007) contains trenchant contemporary assessments of the US process, and Getter (2014) for a more recent discussion.

All Euro area banking systems increased their assets by 40 to 150 percent of output between 2002 and 2009 except Ireland (where it rose by an astonishing 660 percent). Luxemburg is excluded as it is essentially an off-shore center.

While equivalent data are not available, it seems likely that the UK banks also expanded into investment banking. This was certainly true of the Irish banks—which were also under “light-touch” regulation—whose ratio of commercial loans to assets had sunk to one quarter by 2008, the lowest in the Euro area.

The inclusion of Austria and Finland in the periphery group is for convenience and makes little difference to the calculations as their economies are small.

Pagano and others (2014) discuss this trend in more detail.

The assets reported for the investment banking groups are considerably larger than the assets of the broker-dealer sector reported earlier, underlining that broker-dealers only represented the core institutions within these wider investment banking groups.

Lane (2013) contains an analysis.

Bernanke (2008).

The impact of private sector safe assets on interest rates and the macroeconomy are discussed in Gorton and Ordoñez (2013) and Caballero, Farhi, and Gourinchas (2016).

This is calculated by summing data on holdings of US debt by foreign official institutions and holdings of GSE securities by the five most important emerging markets. The latter adjustment reflects the use of GSE bonds as reserves by some countries, most notably China.

This calculation assumes that all of the asset purchases went into US securities, which seems reasonably given the rapid reduction in such assets after the crisis.

4 A Flawed Monetary Union

Marsh (2011), pp. 45–6.

Brunnermeier, James, and Landau (2016) contains a much more detailed treatment.

Eichengreen (2008), pp. 15–16.

James (2012), pp. 74–85.

Quoted in Marsh (2011), p. 62.

Ibid., p. 63.

Enormous amounts of energy were extended on the details of this proposal, essentially deciding whether to reduce the stringency of monetary constrains by widening the bands around the dollar while leaving European bands unchanged or to tighten monetary cooperation by leaving dollar bands unchanged and tightening European ones. In the end they chose the latter, with US exchange-rate bands left unchanged at 0.75 percent and European bands narrowed from 1.5 percent to 1.2 percent.

Ibid., Chapter 4.

Ibid., p. 152.

Ibid., p. 154.

Samuel Brittan of the Financial Times, quoted ibid., p. 181.

Short (2014) provides an entertaining biography of Mitterrand.

Marsh (2011), pp. 66–8.

Ibid., p. 122.

Ibid., p. 124.

The deliberations were taped, so we have a good record of what was said, as discussed in James (2012).

Ibid., p. 238.

Ibid., p. 237.

Ibid., p. 249.

Ibid., p. 251.

Ironically, it was governor de Larosière who supported an effective supervisory mechanism in Stage 2 and beyond.

Ibid., p. 144.

Ibid., p. 153.

Ibid., p. 202.

Ibid., p. 110.

5 Intellectual Blinkers and Unexpected Spillovers

Honorable exceptions include Bill White at the Bank of International Settlements and the academics Nouriel Roubini and Robert Shiller.

Bank of England website.

The weight on high volatility sectors, such as durable goods and construction, that contributed disproportionately to the volatility of output remained largely unchanged over time. Similarly, while greater access to loans would smooth consumption of goods that provided immediate satisfaction (such as meals) this would not necessarily occur for goods that provided their services gradually over time, such as cars. Ye t volatility had also fallen in the latter sectors.

Ibid.

Bergsten and Green (2016) contains an extensive discussion of the Plaza Agreement.

The University of Toronto has an excellent website with all of the main G7 documents, including the communiqués.

For more detailed critiques of DSGE models see Romer (2016) and Bayoumi (2016b).

Romer (2016) observes that in the models built by academics, monetary policy often had implausibly limited effects, while Bayoumi (2016b) argues the monetary effects are too large in models built by policymakers.

See, for example, Benes and Green (2016).

Greene (2004) provides an excellent intuitive explanation of the problems involved.

6 A History of the International Monetary System in Five Crises

International Monetary Fund (2012b), p. 13, paragraph 16. The references contained in the original have been taken out for the sake of readability. See also the main paper, IMF (2012a).

The US crisis had some elements of a domestic sudden stop as some of the speculative money was transferred to treasuries, which may explain the lower costs to the United States (although all crises had significant involvement of domestic speculators). The Euro area crisis did not have this characteristic as there were few centralized funds to support crisis countries.

Recent changes to balance of payments statistics allow a finer breakdown between debt and equity purchases than the one used here, in particular as regards foreign direct investment. The overall result, however, is similar and since the data does not go back reliably over time I use the simpler definition of debt and equity flows.

There is a similar, if less direct, increase in risk for investors who lend in dollars, as a depreciation in the value of the pound increases the cost of dollar repayments for all foreign investors, thereby making all of the loans riskier.

Jeanne and Zettelmeyer (2005) provide a survey. See Krugman (1992) on the first generation models and Obstfeld (1996) on the second generation.

This is closely related to earlier models of bank runs, in which a run is always a risk unless government insurance gives depositors the assurance that their money is safe. Diamond and Dybvig (1983).

IMF (2012b) paragraph 18 and references therein.

Garber (1993) contains a more detailed description of the collapse of the Bretton Woods system.

Eichengreen (2008) contains a description of the evolution of capital market regulation over time.

The Bretton Woods system came to maturity in 1960 after the termination of the European Payments Union (EPU), an arrangement that curtailed even current account transactions because of the severe shortages of dollars after the war.

Ibid., p. 204.

Seidman (2000), pp. 127–8.

L. William Seidman, quoted in Federal Deposit Insurance Corporation (1997b), p. 207.

James (2012), Chapter 4, provides a blow-by-blow account of the snake.

Marsh (2011) contains a lively description.

James (2012), pp. 174–7.

Dooley (1994) is the only description of the crisis that argues that banks lent on the expectations of a bail-out.

A partial exception may be the break-up of Bretton Woods, since its likely demise was in the words of one commentator “one of the most accurately and generally predicted of major economic events”, Garber (1993). However, fuzzy acceptance of the limitations of the system did not prevent participants from trying to shore it up, suggesting that there was less uniformity on its terminal state that this quote suggests.

There are many approximations in these calculations. For example, growth is measured in real terms while the trade balance in nominal terms. However, the misery index still provides an intuitive measure of the size of a crisis.

The United States for the break-up of Bretton Woods, Mexico and Brazil for the Latin American crisis, the United Kingdom, Italy, and France for the ERM, Thailand, Malaysia, Indonesia, and South Korea in the Asian crisis, and the United States, Italy, Spain, Ireland, Portugal, and Greece for the North Atlantic experience.

Washington Leaders’ Summit Communiqué, from the University of Toronto “G20 Information Center” website.

An alternative is to have permanent capital controls, but this runs the risk of reducing the benefits from access to international debt markets in normal times.

7 Will Revamped Financial Regulations Work?

Getter (2014) describes the US approach.

Davis Polk (2014) provides details.

Schoenmaker and Véron (2016) contains a fuller description.

For a useful summary of Dodd–Frank see Morrison and Foerster (2010).

On holdings of government debt see Véron (2016). Within these broad aggregates there are interesting country variations. In the periphery, assets as a ratio to output shrank most in crisis countries with easily identified bubbles and/or financial programs. Within the core countries, the adjustments have been larger in Germany and Belgium than in France and the Netherlands.

the IMF’s April 2017 Global Financial Stability Report.

The investment banks are proxied by assuming their assets are double those of the broker-dealers, as discussed in Chapter 3.

8 Making Macroeconomics More Relevant

Quoted from the communiqué, available on the University of Toronto website on the G20.

Faruqee and Srinivasan (2012) discuss the Mutual Assessment Process in detail.

A series of gold discoveries in the late nineteenth century, most notably in Australia, ended the Long Depression.

9 Whither EMU?

Ibid.

This ignores the zero lower bound, which has created problems for the monetary response to the region-wide shock caused by the North American crisis.

A formal model is contained in Morgan, Rime, and Strahan (2004).

Germany, France, Italy, Spain, the Netherlands, Belgium/Luxembourg, Greece, Austria, Ireland, Portugal, and Finland.

Finally, trade with the rest of the world seems to be less stable, reflecting the inclusion of a lot of major commodity exporters whose trade is affected by commodity prices.

Glick and Rose (2016) provide a succinct review of the literature.

Many thanks to Professor Andrew Rose of Berkeley for running these custom regressions for me.

In the case of the bankruptcy of Continental Illinois Bank in 1982, the FDIC used its powers to guarantee other creditors and noninsured depositors so as to avoid further financial spillovers.

There was also a more localized fall in house prices in Michigan over 1979–84.

Bayoumi and Masson (1998) contains a discussion and estimation of the differences in automatic stabilizers. Röhn (2010) contains more recent evidence on the Ricardian offset.

European Commission (1989).

For example, Beyer and Smets (2015) find that “the greater homogeneity of the US economy is reflected in the fact that the US factors plays a more important role in accounting for both employment growth and employment rate [i.e. unemployment] fluctuations”.

Final Thoughts

The exception was Ireland, where the lending boom and subsequent crisis was driven much more by banking competition than by a sudden reduction in borrowing costs.

The literature on whether these charges are still too low is summarized in Cline (2017).

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Index

A

  • Abe, Shinzo, 215–16

  • ABM AMRO (Dutch bank), 89

  • accounting standards, 95

  • Alaska (US state), 53

  • Amalienborg castle, Denmark, 118

  • Andreotti, Giulio, 128

  • Anglo-Irish Bank, 186

  • Argentina, 166

  • Asia

    • financial crisis (1990s), 157, 171–3, 175

    • inflows, 171

  • asset prices and bubbles, 224, 226–7, 230

  • Australia

    • banking system, 96–7

    • seeks to revive MAP, 217

  • Austria

    • expansion in assets, 86

    • trade boost, 239

B

  • Baer, Gunter, 123

  • Bagehot, Walter, 138

  • Baker, James, 127

  • Balladur, Edouard, 122

  • Baltic region: banking crashes, 88

  • Banco Nazionale di Lavoro, 89

  • Banco Português de Negócios, 186

  • Bank of America (US bank)

    • assets, 93

    • as national bank, 54, 66

    • as regulated bank, 45

    • strongly capitalized, 69

  • Bank Brussels Lambert, 35

  • Bank of England

    • handles government finances, 138

    • stabilizes failing banks, 138

  • Bank Holding Company Act (US, 1956), 53

  • Bank for International Settlements, 110, 212

  • Bank One Corporation (US bank), 69

  • Bankers Trust (US bank), 35, 38

  • Bangkok International Banking Facility, 171

  • Bankia (Spanish bank), 186

  • Banking Act (US, 1933), 244

  • Bankruptcy Abuse and Consumer Protection Act (US, 2005), 74

  • banks

    • accounting standards and practices, 95

    • borrowing rates, 138–9

    • capital buffers, 52, 66, 68, 78–80, 82, 89–90, 94–5, 180, 187–8, 190, 196, 198–9, 201, 204–6, 211, 251–2, 255

    • capital standards, 25–7, 41, 90

    • collateral in repo deals, 74–5

    • commercial and investment separated, 19, 27, 30, 58–9

    • deposits and loans, 63

    • dual system (US), 54–5

    • equity and total assets, 41

    • European interest rates, 98–9

    • failures and corrective action (US), 51–2

    • government support for, 244–5

    • herding, 174

    • internal discipline, 79, 83–4, 250–1

    • liquidity standards redefined, 188–9, 205

    • market opportunities, 254

    • and North Atlantic crisis, 133–4, 174

    • proposed union in Europe, 191–4

    • regulation in Europe, 19, 24–5, 136–7, 232, 243

    • risk models, 28–33, 40, 41, 43, 136

    • shadow (US), 44–5, 47–8, 52, 54–5, 59, 62–3, 71, 91, 95

    • system reformed after North Atlantic crisis, 186–91

    • US national (interstate), 53–4, 62, 66–7, 243

    • see also central banks

  • Banque de France, 138

  • Barclays (UK bank)

    • acquires Lehman Brothers post-bankruptcy remnants, 186

    • backing, 67

    • competes with major US banks, 94

    • as LTCM creditor, 60

  • Baring Brothers (UK bank), 38, 138

  • Basel Committee on Banking Supervision

  • and banking regulation, 10, 16, 25, 32, 40–1, 52, 57

    • and creation of Euro mega-banks, 77–8

    • on internal risk models and capital buffers, 250

    • and market risk, 42

    • and measures of capital buffers, 89–91

    • membership, 26–7

    • and repo market, 75

    • rules upgraded, 186–91

    • and US housing market collapse, 93

    • and voluntary regulation, 85, 136

  • Basel 1 Accord, 26–8, 73, 78, 205

  • Basel 2 Accord, 75, 77–86, 186

  • Basel 2.5 system, 186

  • Basel 3 agreement, 187–9, 252

  • Basel 4, 189

  • BBVA (Spanish bank), 38, 42, 193, 201, 211

  • Bear Stearns (US investment bank)

    • assets, 93

    • bankruptcy, 47

    • and European competition, 67, 94

    • as investement bank, 45, 67

    • lightly capitalized, 69, 95

    • merges, 85

    • as regulated bank, 195

    • rescued, 133, 150

    • and upgrading of Basel 2, 186

  • Belgium

    • bank assets, 15

    • banking expansion, 33, 36, 38

    • banking system (2002), 42, 73

    • close economic ties with Germany, 240

    • debt ratio, 130

    • in European Coal and Steel Community, 111

    • and financial crisis, 5

    • and investment banking, 86

    • and monetary union, 19, 115

    • trade boost, 239

  • Benelux countries (Belgium, Netherlands, Luxembourg), 168

  • benign neglect, 134, 146–51, 187

  • Berlin Wall: falls (1989), 127, 130, 169

  • Bernanke, Ben, 209

  • Better Regulation Action Plan (UK, 2005), 83

  • BIS, see Bank for International Settlements

  • Bismarck, Prince Otto von, 112

  • Black Wednesday (Europe, September 16, 1992), 170

  • BNP Paribas (French bank)

    • assets reduced, 201

    • competes with major US banks, 94

    • expansion, 16, 38–40, 42, 86

    • suspends Net Asset Value calculation, 2–3

  • BNP Paribas ABS EONIA, 2

  • BNP Paribas ABS EURIBOR, 2

  • Brandt, Willy, 116

  • Brazil

    • debts, 165–6

    • exchange rate collapse (1999), 13

  • Bretton Woods

    • break-up of system, 117–18, 147, 161–4, 168, 172–3, 175, 177, 253

    • conference, 9, 114, 116

    • fixed exchange rate system, 147, 158, 161–2

    • and monetary policy, 151

  • Brexit, 247

  • broker-dealers, 58–9, 62, 65–6, 74, 91, 197

    • see also investment banking; USA: shadow banks

  • Brown, Gordon, 83

  • Bryan, William Jennings, 219

  • budgets: planning, 221

  • Buffet, Warren, 137

  • Bundesbank

    • ceases support for pound and lira, 170, 179

    • on cooperation of fiscal and monetary policy, 219

    • and European exchange rate system, 119, 168

    • and European integration, 112, 116

    • and European monetary union, 122

    • and formation of European Central Bank, 125

    • Frankfurt location, 111

    • and German reunification, 169

    • on independence of European Central Bank, 24

    • raises interest rates, 128

  • Burns, Arthur, 165

  • Bush, George W., 213

  • business cycle, 141–2, 145, 208–9, 248

C

  • California: house price fall, 244

  • Canada

    • banking system, 96

    • in Basel Committee, 27

    • and Louvre Accord, 149

  • Case Shiller house price index, 70

  • central banks

    • and effect of inflation, 142, 146

    • failure to apologise for crisis, 253

    • and fiscal expansion, 212

    • independence, 218, 221–2

    • and inflation targeting, 215

    • and monetary policy, 143–4, 221–2

    • and quantitative easing, 210

    • responsibility for controlling

    • macroeconomic fluctuations, 213

    • responsibility for delivering low inflation, 209

    • revive growth and inflation, 227

    • role, 138

    • see also European Central Bank

  • Centre for Economic Policy Decisions, 125

  • Chaebol (South Korea), 172

  • Charlemagne, Emperor, 114

  • Chase Manhattan Bank (US bank), 54

  • Chemical Bank (US bank), 54

  • China

    • currency depreciation, 172

    • Euro area trade with, 238

    • in G20 group, 150

    • investments in US, 252

    • joins World Trade Organization, 150, 238

    • rise as economic power, 151

  • Citigroup (US bank), 46, 54, 66

    • assets, 93–4

    • banking model, 90

    • low capital buffer, 95

    • as national bank, 54

    • rescued, 105

    • strongly capitalized, 69

  • collateralized debt obligations (CDOs), 3, 61–2

  • Collins amendment (US), 196

    • see also Dodd–Frank Act

  • Commerzbank (German bank), 38, 41, 42

  • Commodity Futures Trading Commission (US), 56

  • Comptroller of the Currency (US) see Office of the Comptroller of the Currency

  • Congressional Research Service (US), 85

  • Consolidated Supervision Entities (CSE), 85

  • Consumer Financial Protection Bureau (US), 196, 198

  • Consumer Protection Act (US, 2010), 195

  • Continental Illinois Bank and Trust Company (US bank)

    • Bank of America acquires, 54

    • failure (1984), 26, 51

  • Copenhagen European leaders summit (1978), 118

  • copyright, 223

  • Council of Governors (Committee of Governors of the Central Banks; Europe), 116, 126

  • Cox, Christopher, 85

  • Credit Agricole (French bank), 38, 42

  • Credit Suisse First Boston (Swiss/US bank), 60, 167

  • Cummings, Christine, 28

  • currency unions, 235–43, 249

    • see also European Monetary Union

  • Cyprus, 231

D

  • dealers see broker-dealers

  • debt flows (international), 157–61, 178–81

  • debts: repayment, 211

  • Declaration of Strengthening the Financial System (G20, 2009), 185

  • Delors, Jacques

    • advocates strong franc, 120

    • Committee and Report, 24, 110, 114, 117, 121–7, 132, 153, 169

    • and common currency, 19

    • as President of European Commission, 18

  • Denmark

    • accepts Basel capital rules, 127

    • and currency fluctuations, 117

    • invited to join European Economic Community, 115

    • rejects European Monetary Union, 128, 169–70

    • in Scandinavian monetary union, 114

  • Depository Institutions Deregulation and Monetary Control Act (US, 1980), 47

  • deposits: uninsured, 68

  • derivatives, 60, 196

  • Deutsche Bank (German bank)

    • assets reduced, 201

    • backing, 67

    • branches abroad, 20

    • and capital buffers, 191

    • capital ratios, 90

    • competes with US major banks, 94

    • expansion, 35, 39–41, 42, 86, 88

    • international scope, 193

    • power, 16, 168

    • under pressure to accept reform, 186

  • Deutsche mark

    • appreciates against dollar, 163–4

    • dominance, 117–18, 120

    • revalued, 120

  • Dexia (French/Belgian bank), 38, 42, 90, 186, 201

  • Dodd–Frank Act (US, 2010), 185, 189, 195–6, 213

  • Doha round of trade talks (2001), 150

  • dollar

    • appreciates (early 1980s), 161

    • devalued, 149

    • and fixed exchange rate system, 147, 161

    • as central currency, 114

    • oil priced in, 165

    • value pegged to gold, 162–4

  • Draghi, Mario, 191, 231, 233

  • Duisenberg, Wim, 123, 126

  • dynamic stochastic general equilibrium models (DSGE models), 143–5, 148, 152–4, 222

E

  • East Germany: Ostmarks converted to Deutsche marks, 128, 169

  • eastern Europe

    • and labor market, 247

    • trade with Euro area, 238–40

  • economic models

    • distort policymaking, 151–5, 207

    • see also dynamic stochastic general equilibrium models

  • ‘Economists’ (Euro area): differences from ‘Monetarists’, 112, 115–16, 124, 130, 235

  • efficient market hypothesis, 134–40, 146

  • Eichengreen, Barry, 240

  • Emergency Home Finance Act (US, 1970), 49

  • Emminger, Otmar, 116

  • employment: and fiscal and monetary policy, 147

  • Euro area (and Europe)

    • accepts Basel 3 framework, 189

    • bank assets reduced since 2008, 200–1

    • bank internal risk models, 190, 245

    • bank lending expansion, 250

    • bank resolution system (2014), 193

    • banking system expansion and transformation (1985–2002), 15–16, 33–5, 96–7

    • banking system in 2002, 42–3, 199

    • banking system shrinks since 2009, 200

    • and banking union, 185

    • banks fund US housing bubble, 93

    • banks under ECB supervision, 205

    • banks’ overseas expansion, 86–8, 95, 102–3

    • bond yields, 99, 103

    • borrowing rates converge, 138–9

    • business cycles, 248

    • capital gains, 103

    • causes of financial crisis, 105–6

    • causes of regional separation, 242

    • centralized bank regulation and support, 24–5, 232, 243–4, 252

    • core and periphery banks, 72–3, 86–9, 139

    • debt breaks, 245–6

    • depression, 230

    • domestic (national) banking, 37–8

    • early national banking system (1980), 16

    • effect of post-crisis changes on banks, 199–202, 208

    • and exchange rate instability, 170

    • failure to achieve integrated banking, 42

    • financial reform in, 250

    • fiscal deficits limited, 233, 245–6, 249

    • fiscal policies tightened, 155

    • foreign banks in, 17

    • foreign trade, 238–9

    • growth forecasts, 215

    • house prices, 100–2, 105

    • inadequate fiscal buffers, 245–6, 252–3

    • inflation rates, 214

    • institutional changes, 231–4

    • internal exchange rates, 117–19

    • investment spending, 99–100

    • labor markets and migration, 246–7

    • lends to US, 84, 173

    • limited support for troubled banks, 133

    • mega-banks, 8, 15, 31–2, 37–41, 71, 84, 96, 190, 201–2, 229, 252

    • member countries, 111

    • monetary (currency) union, 109–14, 126, 153, 229, 236–8, 240–3, 249

    • move to banking union, 191–4, 213, 230

    • move to economic integration, 111–12

    • need for area-wide bank support system, 206

    • and origins of World War I, 9

    • outflows, 156, 171

    • output losses, 5–6, 11

    • overbanked, 206

    • political divisions, 236

    • post 2002 financial boom, 199

    • product market, 246–8

    • and proposed leverage ratios, 189–91

    • residential spending, 100

    • resolution fund for insolvent banks, 232

    • responsibility for macroprudential policies, 211

    • single currency, 109–10, 112, 130–2, 169, 235

    • spending boom, 97–8

    • stock market fall from 2007, 3, 86–9

    • surveillance of members reduced, 129–30

    • trade balance, 148

    • universal bank expansion in US, 70, 84

    • unprepared for crisis, 133

  • Euro (currency)

    • as boost to integrated economy, 235, 237–8

    • introduced (1999), 98, 138–9, 229, 254

  • European Banking Authority (EBA), 190

  • European Central Bank (ECB)

    • agreed by Delors Committee, 122–5

    • aided by expansion, 229

    • and bank supervision, 24–5, 232, 243

    • committed to low inflation, 216

    • effect of, 208

    • financial supervision centralized in, 231

    • and Greek debt crisis, 233

    • guiding principles, 131

    • ignores US financial problems, 149

    • injects liquidity into markets, 7

    • Joint Supervisory Team, 192

    • and Maastricht Treaty, 128–9

    • and move to banking union, 191–4

    • non-adoption of leverage ratio, 189

    • policy rate, 144

    • raises rates, 133

    • vets European Stability Mechanism, 231

    • weakness, 105

  • European Coal and Steel Community, 111

  • European Commission

    • Brussels location, 111

    • confederated structure, 234

    • created, 112

    • European Capital Adequacy Directive, 28

    • and European integration, 18–19

    • Monetary Committee, 170

    • plans for integrated banking system, 20–2

    • and proposed monetary union, 23, 115–17

    • rules on excessive debts, 233

    • Second Banking Directive, 19–20, 24, 27, 32

    • and Stability and Growth Pact, 151

    • vets European Stability Mechanism, 231

  • European Community Council of Ministers (ECOFIN), 117

  • European Council, 17, 115

  • European Currency Unit (ECU), 119, 124

    • see also Euro

  • European Economic Community

    • Common Agricultural Policy, 168

    • currency fluctuations, 117

    • customs union, 167

    • fixed exchange rates, 167

    • formed, 16–17, 112

    • and free movement of capital, 121–2

    • see also European Union

  • European Financial Stabilisation Mechanism, 231

    • see also European Stability Mechanism

  • European Financial Stability Facility, 231

    • see also European Stability Mechanism

  • European Monetary Cooperation Fund, 117, 126

  • European Monetary Fund, 118, 168

  • European Monetary Union (EMU)

    • and bank deposit insurance, 193

    • design, 153

    • and fall of interest rates, 36, 98, 102

    • future, 132, 248–9

    • and increasing economic integration, 237

    • initial members, 151

    • long-term expectation, 234

    • Maastricht Treaty initiates, 19

    • positive effects, 99, 248

    • principles and flaws, 229

    • reduces risk premiums, 98

    • trade and single currency, 238–40

  • European Reserve Fund, 125

  • European Stability Mechanism (ESM), 194, 231–3

  • European System of Central Banks (ESCB), 24, 126, 192

  • European Union

    • alterations at times of distress, 234

    • and banking regulation, 10, 19–21, 23–5, 27–8, 187

    • commitment to closer (federated) union, 234

    • economy contracts, 151

    • and free movement of goods, services, labor and capital, 121

    • implements Basel 2, 83

    • integrated banking system, 32, 37

    • name adopted, 18, 112

    • single currency (Euro), 10, 19

    • on supervision of investment banking groups, 85

    • see also European Economic Community

  • Evian, Switzerland, 122

  • Exchange Rate Mechanism (ERM)

    • Balladur proposes reforms, 122

    • and Bretton Woods fixed exchange rate system, 147, 158, 162–3, 253

    • crisis (1992–3), 169–70, 172, 175, 177, 179

    • and Delors Committee, 124, 126

    • and German reunification, 169

    • introduced, 17, 118–20, 168–9

    • suffers from speculative attacks, 158

    • exchange rates determined by private markets, 147

    • Europe introduces, 117

    • and floating exchange rate system, 161

    • and international debt flows, 159–60

F

  • Fannie Mae (government-sponsored enterprise, US)

    • capital buffers, 94–5

    • collapses, 95

    • dominates securitization market, 91

    • expansion, 68–9

    • formed, 48

    • issues mortgage-backed securities, 45, 50, 63

    • nationalized, 197, 204

    • profits squeezed, 49

    • upper loan limits, 76

  • Federal Deposit Insurance Corporation (FDIC, US), 55–6, 84–5, 187, 244–5

  • Federal Deposit Insurance Corporation Improvement Act (US, 1991), 52

  • Federal Home Loans Banks (US), 64

  • Federal Reserve Bank see United States Federal Reserve Bank

  • financial crises

    • causes and effects, 175–7

    • and regulation reform, 185

    • see also North Atlantic crisis

  • financial markets see markets (financial)

  • Finançial Services Agency (UK), 83

  • Financial Stability Board (earlier Forum), 185

  • Financial Stability Oversight Council (FSOC, US), 196, 198

  • Finland

    • escapes crisis, 15

    • expansion in assets, 86

    • trade boost, 239

  • fiscal policy, 147–8, 152–3, 209, 212, 215, 219

  • FleetBoston Financial Corporation (US bank), 69

  • Ford, Gerald, 165

  • Fortis (Belgium/Netherlands bank), 89, 186

  • France

    • agricultural lobby, 121

    • aims for integrated Europe, 111–12

    • bank assets, 15

    • bank branches in other countries, 20–1

    • banking expansion, 33, 36, 38

    • banking system (2002), 42

    • banking system nationalized under President Mitterrand, 16, 120

    • close economic ties with Germany, 240

    • differences with Germany over monetary union, 109–10, 114–17, 122, 128–32, 230, 234, 248

    • and ERM crisis (1992), 170

    • in European Coal and Steel Community, 111

    • and European exchange rate system, 118–20, 170

    • favours political control of central bank, 113

    • and financial crisis, 5

    • franc fort policy, 120

    • high inflation, 17, 115, 117, 120

    • interest rates, 251

    • internal risk models, 43

    • leaves and rejoins snake, 118

    • and investment banking, 86

    • outflows, 173

    • reduces fiscal deficit, 233

    • and single currency, 10, 19, 237

    • status in European Commission, 18

    • suspends sanctions for high fiscal deficits, 129

  • Freddie Mac (government-sponsored enterprise, US)

    • capital buffers, 94–6

    • dominates securitization market, 91

    • expansion, 68–9

    • mortgage-backed securities, 49–50, 63

    • nationalized, 197, 204

    • profitability, 49

    • upper loan limits, 76

  • Friedman, Milton, 112

  • funding corporations, 65

G

  • G7 leaders’ summits, 149–51

    • Hokkaido Toyako (2008), 149–50

    • Venice (1987), 149

  • G20 group

    • Chengdu (2016), 217

    • London (2009), 178, 185

    • Pittsburg (2009), 217

    • and fiscal stimulus, 210–12, 215

    • and Financial Stability Board, 185

    • and policy cooperation, 217, 218

    • and reform of banking system, 186

    • regular meetings, 150

  • Geithner, Timothy, 209

  • General Agreement on Tariffs and Trade (GATT), 150

  • General Motors: share value, 135

  • Genscher, Hans-Dietrich, 122, 127

  • Germany

    • accepts monetary union, 127

    • aims for integrated Europe, 111–12

    • bank assets, 15

    • bank branches in other countries, 20–1

    • banking expansion, 33–5, 36, 38

    • banking system (2002), 42

    • controls inflation, 117

    • debts move to, 158

    • differences with France over monetary union, 109–10, 114, 116, 122, 128–32, 230, 234, 248

    • dominance in monetary union, 240

    • Dutch exports to, 148

    • empire founded (1871), 113

    • enforces rules, 8

    • and European exchange rate system, 118–20

    • export-led economy, 242

    • favours independent central bank, 112

    • favours national bank supervision, 24

    • and financial crisis, 5

    • foreign banks in, 21–2

    • interest rates, 98, 128, 251

    • internal risk models, 43, 79

    • Landesbanken, 72

    • and ERM crisis, 172

    • and investment banking, 86

    • reluctance to support periphery countries, 173

    • response to financial crisis, 231

    • reunification following fall of Berlin Wall, 110, 127–8, 130–1, 169

    • and single currency, 10, 19

    • small banks, 72

    • and snake, 168

    • status in European Commission, 18

    • strength of currency, 115

    • supply chain with eastern Europe, 239–40

    • suspends sanctions for high fiscal deficits, 129

    • tax reforms under Louvre Accord, 149

    • and value of currency, 163–4

    • warns of effect of Greek debt, 232

  • Giscard d’Estaing, Valérie, 114, 116, 118, 130, 163, 168

  • Glass–Steagall Act (US, 1933), 27, 45, 53–5, 57, 67, 73, 91, 198

  • Glicenstein, Gilles, 2–3

  • globalization, 148, 156, 159

  • gold

    • and Long Depression, 219

    • standard, 114, 161–2

    • and US dollar, 147, 162–4

  • Gold Pool, 163–4

  • Goldman Sachs (US investment bank)

    • applies for bank holding company status, 93

    • assets, 933

    • becomes regulated bank, 186

    • competes as investment bank, 67

    • and competition with European banks, 94

    • lightly capitalized, 69

    • as LTCM creditor, 60

    • as shadow bank, 45

  • government borrowing, 147–8

  • government-sponsored enterprises (GSEs, US), 45, 48–50, 63, 68–9, 76, 197

  • Graham–Leach–Bliley Act (US, 1999), 54

  • Great Depression (1930s), 46, 147, 207–8, 244

  • great moderation, the, 134, 140–6

  • Greece

    • accepts Basel capital rules, 127

    • adopts Euro, 237

    • fall in interest rate, 139

    • in currency union periphery, 241

    • economic recovery program, 229

    • in Euro area, 111

    • European aid to, 131, 231

    • excessive borrowing and debts, 7, 109, 130, 151, 170, 174, 232–4

    • expansion in assets, 86

    • financial crisis in, 5, 104, 229–30

    • fiscal mismanagement, 208

    • high interest rates, 251

    • joins Euro area, 99

    • loans from other countries, 180

    • product market improvements, 248

    • reduces fiscal deficit, 233

    • role of central government, 8

  • Greenspan, Alan

    • on bank supervision and regulation, 57–8, 136

    • on bank regulation, 136

    • favors reform of Basel 1, 78

    • and predictability of policies, 153

    • on risks posed by investment banks, 30

    • The Age of Turbulence, 30

  • Group of Ten, 25

  • GSEs, see government-sponsored enterprises

H

  • Hawaii, 53

  • HBV (German bank), 89

  • hedge funds, 59–62, 196

  • helicopter money, 212

  • Hoechst (corporation), 16

  • homo economicus, 222, 224–6

  • Hong Kong: and Asian crisis, 157

  • house purchases and prices, 145–6, 211

    • see also United States of America

  • households: in economic theory, 143

  • houses: investment value, 4

  • Housing and Urban Development Act (US, 1968), 48

  • HSBC (UK bank): in US, 94

  • Hugo, Victor, 114

  • human beings

    • fads and crazes, 225–7

    • sociability, 224–5, 228

I

  • IFRB (accounting standards), 95

  • IKB Deutsche Industriebank AG (German bank), 3, 186

  • Illinois (US state): state banking regulations, 51

  • incomes: stagnation, 6

  • Indonesia, 157, 171–2, 174

  • inflation rates, 117–18, 142, 146, 208, 212, 214–16, 219, 227

  • information technology

    • and financial procedures, 141

    • and investment banks, 59

  • ING (Netherlands bank)

    • accepts government capital injection, 186

    • expansion, 16, 35, 39–41, 42, 89

  • Institute for International Finance, 79

  • insurance: and mortgage-backed assets, 91

  • interest rates

    • and borrowing costs, 251

    • capped in US, 45–7, 100, 198

    • and exchange rate, 147

    • and inflation, 209

    • reduced to zero, 210

  • International Monetary Fund (IMF)

    • and perceived anti-China measures, 151

    • on benefits from open capital markets, 157

    • and European Stability Mechanism loans, 231

    • and exchange rate, 147

    • funds increased, 157

    • support in Asia crisis, 178–9

    • loans available, 162

    • as model for European Monetary Fund, 118

    • output gaps, 4

    • resources fall behind increase in world trade, 150

    • on size of global economy, 150–1

  • international monetary system

    • debt flows, 157–8

    • history of crises, 156–8

  • International Swaps and Derivatives Association, 79

  • Intesa Sanpaolo (Italian bank), 38, 42, 90

  • investment banking see also shadow banking

    • benefit from nontraditional cash deposits, 65

    • funding, 61

    • and hedge funds, 60

    • and information technology, 59

    • regulation, 57–8

    • role and conduct, 58–62

  • Ireland

    • accepts Basel capital rules, 127

    • bankers in, 8–9

    • banking expansion, 36–7, 42

    • borrowing excesses, 174

    • as ‘Celtic tiger’, 37

    • and currency fluctuations, 117

    • in currency union periphery, 241

    • in Euro area, 111

    • European aid to, 231

    • invited to join European Economic Community, 115

    • expansion in bank assets, 86

    • financial crisis in, 5, 208, 229

    • foreign investments in, 43

    • ‘light touch’ regulation, 32, 36, 42, 83–4, 136

    • reduces fiscal deficit, 233

    • successful effect of reforms, 216

  • Italy

    • borrowing interest rate, 139

    • commercial loans, 36

    • connected firms in, 8

    • in currency union periphery, 241

    • debt ratio, 130

    • in Exchange Rate Mechanism, 169

    • expansion in bank assets, 86

    • financial crisis in, 5, 208

    • high interest rates, 251

    • housing boom, 72

    • inflation rises, 17, 117

    • joins European Coal and Steel Community, 111

    • large outflows, 173

    • leaves Exchange Rate Mechanism, 158

    • low growth, 174

    • and monetary union, 115

    • product market improvements, 248

    • reduces fiscal deficit, 233

    • supports suspension of sanctions for high fiscal deficits, 129

    • ten-year bonds, 98

    • see also lira

  • ITT (corporation), 16

J

  • Japan

    • banking system, 96

    • in Basel Committee, 27

    • controls inflation, 117

    • debts outflow to, 158, 164

    • depression, 215

    • economic growth, 115

    • floating exchange rates, 167

    • and Louvre Accord, 149

    • Prime Minister Abe’s economic reforms (‘Abenomics’), 213, 215–16, 228

  • JP Morgan Chase (US bank), 46

    • acquires Bear Sterns, 186

    • assets, 93–4

    • banking model, 90

    • as national bank, 54, 66

K

  • Keynes, John Maynard, 146, 162

  • King, Mervyn, 23, 136, 209

  • Kohl, Helmut, 110, 121–2, 127, 130–2, 169

  • Kohn, Donald L., 144

L

  • labor markets: Euro area versus US, 246–7

  • Lamfalussy, Alexandre, 125

  • Larosière, Jacques de, 123–4

  • Latin America: debt crisis, 158, 164–7, 172–3, 175, 177, 180

  • Latin League (1865), 114, 249

  • Lawrence, T.E. (‘Lawrence of Arabia’), 8

  • Lehman Brothers (US investment bank)

    • assets, 93

    • bankruptcy and collapse, 4, 7, 9, 45, 75, 85, 105, 133, 138, 150, 155, 185, 195, 229, 232

    • competes with other investment banks, 67

    • and European bank competition, 94

    • lightly capitalized, 69, 95

    • non-participation in rescue of LTCM, 60

    • as regulated bank, 195

    • rescue, 186

  • Leigh-Pemberton, Robert, 24, 123, 125–6

  • leverage, 145, 187, 189–91, 196, 198, 202

  • Lewis, Michael: The Big Short, 225

  • light touch regulation, 32, 36, 42, 83–4, 136

  • lira (Italian currency)

    • Bundesbank ceases to support, 170, 179

    • ejected from ERM and rejoins, 128

    • see also Italy

  • Lisbon accords (2000), 246

  • loan-to-value ratios, 181

  • London

    • ‘big bang’ (October 1986), 35

    • as financial center, 35–6

  • London Interbank Offering Rate (LIBOR), 165–6

  • Long Depression (1870s), 219

  • Long-Term Capital Management (LTCM; hedge fund), 60, 70

  • Louvre Accord (1987), 149, 218

  • Lucas, Robert E., 142

  • Luxembourg

    • in European Coal and Steel Community, 111

    • and monetary union, 115

M

  • Maastricht Treaty on Economic Union (1992), 10, 16, 19, 23–5, 32, 43, 110–11, 114, 127–32, 169, 192–3, 229, 234

  • macroeconomics

    • and ‘Abenomics’, 216

    • and attitude to free markets, 214–15, 222–7

    • and business cycle fluctuations, 208

    • and DSGE models, 222

    • and effect of single currency, 240

    • and ‘homo economicus’, 222, 224–6

    • internal balance, 147

    • origin after Great Depression, 207

    • orthodoxy and policy challenges, 208–14, 227, 253

    • and policy cooperation/integration, 151, 219–22

    • and private sector, 227

    • and role of central banks, 213–14

    • unsettled environment, 198

    • and wariness of major structural reforms, 228

  • Maine (US state): and interstate banking, 53

  • Malaysia: Asia financial crisis 157, 171–2, 174, 180

  • Manufactures Hanover (US bank), 54

  • markets (financial)

    • and competition, 147

    • differ from country to country, 137

    • and macroeconomic theory, 214–15, 222–7

    • unpredictability, 154

    • see also efficient market hypothesis

  • Merrill Lynch (US investment bank)

    • and European competition, 94

    • lightly capitalized, 69, 95

    • as LTCM creditor, 60

    • merges, 85

    • as regulated bank, 195

    • size, 67

  • Merriweather, John, 60

  • Merton, Robert, 60

  • Mexico: debts, 165–6

  • micro-prudential regulation and supervision, 137, 209

  • misery index, 175, 181

  • Mitterrand, François, 16, 18, 110, 120–2, 124, 127–8, 130, 169–70

  • Models Task Force, 28

  • ‘Monetarists’ (Euro area): differ from ‘Economists’, 112, 115–16, 124, 130, 235, 249

  • monetary policy, 142–6, 151–3, 212, 215, 219–21

    • see also currency unions

  • monetary union see European Monetary Union; single currency

  • Monnet, Jean, 234

  • monopolies, 223

  • Morgan Grenfell (UK investment bank), 35, 38

  • Morgan, John Pierpont, 138

  • Morgan Stanley (US investment bank)

    • applies for bank holding company status, 85

    • assets, 93

    • becomes regulated bank, 186

    • and European competition, 94

    • lightly capitalized, 69

    • as LTCM creditor, 60

    • as shadow bank, 45

    • size, 67

  • mortgages

    • back assets and securities, 45, 50, 71, 76–7, 197

    • bundling, 8

    • creditworthiness and securitization, 63–5, 69, 78, 91–2, 197

    • European investment in US, 73

    • market collapse, 77

    • residential, 64

    • sale of, 8, 55

    • subprime, 76–7, 88, 105, 133

    • in US, 3, 49–50, 52

  • Moynihan, Daniel, 146–7

  • Mullins, David, 60

  • Multilateral Development Banks (MDBs), 178

  • Mutual Assessment Process (MAP), 217

  • mutual funds, 45, 60

  • mutual recognition (European Union), 20–1

N

  • Napoleon I (Bonaparte), Emperor of France, 113–14

  • NationsBank (US bank), 54

  • Natixis (French bank), 38, 42

  • net asset value (NAV), 2

  • Net Capital Rule (US), 56, 85

  • net stable funding ratio (NSFR), 189

  • Netherlands

    • aims for European integration, 112

    • bank assets, 15

    • banking expansion, 33–5, 36, 38

    • banking system (2002), 42, 73

    • close economic ties with Germany, 240

    • and ERM crisis, 170

    • in European Coal and Steel Community, 111

    • exports to Germany, 148

    • and financial crisis, 5

    • guilder revalued, 120

    • and investment banking, 86

    • and monetary union, 19, 115

    • trade boost, 239

  • New Deal (US, 1930s), 55

  • New England (US): house prices, 50, 244

  • New York city: as financial center, 36

  • New York (US state): interstate banking, 53

  • Nixon, Richard M., 146, 164

  • North Atlantic crisis

    • and Basel rules, 96

    • causes, 173–4

    • and currency unions, 241

    • and debt flows, 180

    • and economic models, 152

    • effects and consequences, 175, 210–13, 250, 254

    • ends European banking boom, 18

    • European monetary union effect on, 132

    • and fall in confidence in experts, 253

    • financial boom and bust, 86, 97–105

    • misery index, 175

    • origins (August 2007), 1, 3–4, 8–9

    • output losses, 6–7, 156

    • responses to, 10, 185–6, 190, 205–7

    • responsibility for, 8

    • and speculative ventures, 158

    • unpreparedness, 133–4, 155, 173

    • as watershed event, 6

  • Norway

    • invited to join European Economic Community, 115

    • in Scandinavian monetary union, 114

O

  • Obama, Barack, 212

  • Office of the Comptroller of the Currency (OCC; US), 54–5, 84, 165

  • oil prices, 165–6, 246

  • Organisation for Economic Cooperation and Development (OECD), 247

  • output

    • losses, 4–7, 11

    • volatility, 140–1

  • Outright Monetary Transaction (OMT, Euro area), 191, 231, 233

P

  • Padoa-Schioppa, Tommaso, 123–4, 127

  • Parvest Dynamic ABS, 2

  • petrodollars, 164–5, 173

  • Philippines, 172

  • physics: parallel with economic models, 154

  • Plaza Agreement (1985), 149, 161, 217

  • Pöhl, Karl Otto, 123–6, 129, 166

  • Pompidou, Georges, 116

  • Portugal

    • borrowing interest rate, 138–9

    • commercial loans, 36

    • connected firms in, 8

    • in currency union periphery, 241

    • in Euro area, 111

    • European aid to, 231

    • excessive borrowing, 174

    • in Exchange Rate Mechanism, 169

    • expansion in bank assets, 86

    • financial crisis in, 5, 208, 229

    • high interest rates, 251

    • product market improvements, 248

    • reduces fiscal deficit, 233

    • ten-year bonds, 98

  • pound sterling (UK currency)

    • Bundesbank ceases to support, 170, 179

    • devalued, 163

    • diminishing role, 114

    • leaves ERM, 170

  • prisoners’ dilemma, 226

  • public sector borrowers, 165

Q

  • quantitative easing, 210

  • quantum mechanics, parallels to economics, 143–5, 152–4

  • Quantitative Impact Studies (QISs), 81–2

R

  • Rajan, Raghuram, 155

  • random walk theory, 135

  • rational expectations, 223

  • Reagan, Ronald, 147, 149, 213–14, 254

  • Regulation Q see United States of America

  • Reigal Neal Interstate Branching Efficiency Act (US, 1997), 53

  • renmimbi (Chinese currency): depreciation against dollar (1994), 172

  • repurchase agreements (repos)

    • broker-dealers exploit, 65

    • collateral, 74–5, 197, 251, 255

    • expansion, 103

    • and foreign borrowing, 91–2

    • freeze, 105

    • fund housing bubble, 73–7

    • liquidity, 71

    • market shrinks in US, 197

    • as source of investment bank funding, 61

  • Ricardian equivalence, 148

  • Ricardian offset, 245

  • risk models, 28–33, 40–1, 43, 58, 78–83, 85–6, 136, 139, 187, 190, 196, 199, 245, 248, 255

  • risk-weighted assets, 196, 198, 201

  • Rochard, Michel, 120

  • Rome, Treaty of (1957), 16–18, 111–12, 116, 126, 167, 234

  • Roosevelt, Franklin D., 55

  • Roubini, Nouriel, 155

  • Royal Bank of Scotland (RBS; UK bank), 89

  • Russia

    • exchange rate collapse (1998), 173

    • joins WTO, 150

S

  • safe haven bankruptcy protection (US), 74–5

  • Sanio, Jochen, 3

  • Santander (Spanish bank)

    • assets expanded, 201

    • capitalization, 42

    • international scope, 193

    • as mega-bank, 38

    • takeovers, 89

  • Sants, Hector, 83

  • Savings and Loans (US), 49, 51

  • Scandinavia: monetary union, 114

  • Schmidt, Helmut, 118–19, 130, 168

  • Schoales, Myron, 60

  • Securities and Exchange Commission (SEC; US)

    • and mortgage-backed securities, 76

    • registers hedge funds, 196

    • and regulation, 9–10, 56, 61, 139

    • Release 47683 widens repurchase agreement collateral, 73

    • and repo market, 74–7, 91, 199, 251

  • securitization

    • and mortgages, 45, 63–5, 78, 92, 251, 254

    • private label, 50–2

    • in US, 48, 50, 62, 68, 90–1, 197–8

  • Security Pacific Corporation (US bank), 54

  • shadow banks see United States of America

  • share prices: fluctuations and predictions, 135–7, 139

  • Shiller, Robert, 137, 155, 225

  • Silva-Herzog, Jesus, 166

  • silver: in US money supply, 219

  • single currency

    • benefits, 235

    • effect on trade, 238–40

    • and macroeconomic shocks, 240

    • see also Euro area

  • Single European Act (1986), 12, 16, 18–21, 32, 121–2

  • Smith, Adam, 147, 223

  • Smithsonian Agreement, 117, 168

  • snake currency arrangement (Europe), 117–18, 168

  • Société Générale (French bank): expansion, 38, 41, 42

  • South Korea, 157, 171–2, 174, 178

  • Spain

    • borrowing interest rate, 139

    • caja savings banks, 72

    • commercial loans, 36

    • in currency union periphery, 241

    • ejected from Exchange Rate Mechanism, 128

    • excessive borrowing, 174

    • in Exchange Rate Mechanism, 169

    • expansion in bank assets, 86

    • and ESM funding to restructure banking system, 194

    • financial crisis in, 5, 208, 229

    • high interest rates, 251

    • housing, 4, 72

    • included in Euro area, 111

    • local governments in, 8

    • reduces fiscal deficit, 233

    • successful effect of reforms, 216

    • ten-year bonds, 98

  • Stability and Growth Pact (SGP, Euro area), 129–30, 151, 216, 231–4, 245

  • Strasbourg summit (of European leaders, 1990), 127, 132

  • Strauss-Kahn, Dominique, 210

  • stressed value-at-risk models (SVARs), 186

  • Suez (French bank), 16

  • supply and demand, law of, 222

  • Sweden

    • in Basel Committee, 27

    • and currency fluctuations, 117

    • in Scandinavian monetary union, 114

  • Switzerland

    • in financial crisis, 7

    • trade with EMU members, 238

T

  • taxes

    • cuts, 144, 209, 212–13, 228

    • favor debt over equity, 180

    • kept low, 227

    • little effect on private spending, 153

  • TCW (US bank), 38

  • Texas: house prices fall, 244

  • Thailand, 157–8, 171–2, 174, 178

  • Tatcher, Margaret, 121–3, 125, 127–8, 147, 213–14, 254

  • trade: affected by single currency, 238–40

  • trade balance, 148

  • Travelers Group (US financial institution), 54

  • Trichet, Jean-Claude, 209

  • Trump, Donald

    • elected President, 6

    • and fiscal stimulus, 217

    • looser view on bank regulation, 189

    • proposes tax cuts, 212

U

  • UBS (Swiss bank), 67

  • UniCredit (Italian bank), 38, 42, 89

  • United Kingdom (Britain)

    • bank assets reduced since 2008, 200–1

    • banking expansion, 36–7, 42

    • banking system, 22

    • bond markets, 189

    • central bank independence, 211

    • common capital standard agreed with US, 26

    • core Euro banks expand into, 86

    • and currency fluctuations, 117

    • favors larger bank capital buffers, 43

    • favours EU-wide bank regulator, 24

    • financial crisis (1866), 138

    • foreign banks in, 22

    • foreign investments in, 43

    • high inflation, 17, 117

    • invited to join European Economic Community, 115

    • joins Exchange Rate Mechanism, 169

    • large outflows, 173

    • leaves European Union, 6

    • leaves Exchange Rate Mechanism, 158, 170

    • ‘light touch’ regulation, 32, 36, 42, 83–4, 136

    • in North Atlantic financial crisis (2008), 7

    • opts out of Maastricht Treaty, 128

    • owns US assets, 93, 102–3

    • product market, 248

    • rebate from EEC budget, 121

    • resists monetary union, 122, 128

    • scale of banking, 33

    • separated commercial and investment (merchant) banks, 19

    • trade with EMU members, 238

    • see also pound sterling

  • United States of America

    • accepts Basel 3 framework for large banks, 189–90

    • accounting practices, 95

    • adopts new leverage ratio, 189

    • aggregate spending, 97–8

    • anchor regions and peripheries in currency union, 240–1

    • and Asian crisis, 172

    • assets held by European banks, 41, 102–3

    • bank assets reduced since 2008, 200–1

    • bank deposits migrate, 47

    • bank failures and prompt corrective action, 51–2

    • bank mergers, 54

    • bank size compared with Europe, 96

    • bankers’ morality, 9

    • banking expansion, 95

    • banking regulation, 9, 19, 54–8, 62, 194–9, 243–4, 251–2

    • and Basel 2 accord, 79–85

    • in Basel Committee, 27

    • bond markets, 189

    • bond yields fall, 102–3

    • business cycles, 248

    • champions internal risk models, 86

    • common capital standard agreed with UK, 26–7

    • consumer price index, 146

    • core Euro banks expand into, 86–8

    • as crisis country, 5

    • currency as international standard, 114

    • currency union in, 235–7, 240–3, 246

    • debt outflows, 158–9

    • deregulation, 71, 86

    • devaluation, 149

    • effect of break-up of Bretton Woods on, 175

    • effect of post-crisis changes, 198, 203–5

    • Euro area lends to, 84, 173

    • European universal banks in, 70, 191

    • favors larger bank capital buffers, 43

    • federal support for banks, 244–5

    • federal tax system, 236

    • financial boom, 100–4, 156

    • financial reform in, 194–5, 250

    • financial system (2002), 68–70, 85

    • floating exchange rates, 167

    • Flow of Funds data, 90, 95

    • fractured banking system, 45–6

    • and gold market, 163

    • high tech boom collapses, 144–5

    • house prices, 3, 45, 50, 70–3, 76–7, 91, 93, 101–2, 105, 156, 191, 225, 244, 250, 252

    • imposes surcharge on foreign imports, 164

    • improved monetary policy, 141–2

    • inflation fluctuates, 45–7, 49, 117, 141–2, 146, 214

    • integrated banking system, 248

    • interest rates limited, 45–7, 100, 198

    • investment bank expansion, 67, 70

    • investment bank regulation, 195, 197, 205

    • labor market flexibility, 247

    • and Latin American debt crisis, 166–7, 172

    • misery index, 175

    • modest recovery from crisis, 208

    • national (interstate) banks, 53–4, 62, 66–7, 243

    • national price movements, 238

    • and oil prices, 246

    • output volatility, 140–2

    • policy coordination fades, 216

    • post 2002 financial boom, 199

    • product market, 247

    • recessions (1985–2005), 141

    • regulation of shadow banks, 194–9

    • and repo market, 74–5

    • response to crisis, 207

    • responsibility for macroprudential policies, 211

    • and risk measures, 41, 58

    • securitization, 68, 90–1

    • separates commercial and investment banking, 27, 32, 57

    • shadow banks develop, 44–5, 47–8, 52, 54–5, 62–3, 68, 71, 91, 95, 251

    • and small bank regulation, 206

    • trade balance, 103, 148

    • trade with EMU members, 238

    • unprepared for financial crisis, 133

  • United States Federal Reserve Bank

    • belief in market discipline of investment banks, 70, 79, 83–4, 86, 250

    • and business cycle, 141–2

    • conducts stress tests, 192

    • cooperation of monetary and fiscal policy, 219

    • eases rates, 4, 133

    • easy financing conditions, 252

    • emergency funding, 44, 186

    • faith in investors’ judgment, 136

    • helps stabilize markets, 138

    • and house price boom, 144–5

    • and inflation rates, 141–2

    • monetary policy, 144

    • as proposed model for European Central Bank, 123

    • provides safety net, 7, 195

    • regulates mortgage lending standards, 77

    • and regulation of investment banks, 57–8, 197

    • Regulation Q, 46

    • regulatory function and practice, 10, 30, 53, 55–7

    • response to crisis, 105

    • and risk models, 31–2, 58, 139

    • and tax cuts, 213

    • urges reform of Basel 1, 78

    • warns about loans to Latin America, 180

    • value-at-risk models (VARs), 186

    • Venezuela, 166

    • Versailles Treaty (1919), 9

    • Vietnam War, 114

    • Volcker, Paul, 141–2, 166 rule, 196

W

  • Wachovia Corporation (US bank), 69

  • Wall Street: reform, 195

  • waterfall investment structures, 61–2

  • welfare payments, 153

  • Wells Fargo (US bank), 45, 69

  • Werner Commission Report (Europe) (1970), 113–17, 124–5, 248

  • West Germany

    • economic growth, 115

    • in European Coal and Steel Community, 111

    • see also Germany

  • White, Bill, 155

  • White, Harry Dexter, 162

  • won (S. Korean currency), 172

  • World Bank: and international debt flows, 178

  • World Trade Organization (WTO), 150, 238

Y

  • yen (Japanese currency): depreciation (1990s), 172

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