Jihad Dagher, Giovanni Dell’Ariccia, Lev Ratnovski, and Hui Tong
The recent global financial crisis demonstrated how distressed banks can undermine the real economy that produces goods and services. What started as a financial sector problem—real-estate-related losses at banks and other financial intermediaries—quickly turned into an economy-wide problem, at first in the United States, then in other advanced economies.
The large losses banks incurred stirred fear about their soundness and led to the modern version of a bank run: large uninsured depositors and bank creditors running for the exit (Huang and Ratnovski, 2011). Governments had to inject massive amounts of cash and capital into the banking system to ensure that the institutions had the funds needed to meet their obligations and a big enough buffer to keep them solvent.
Policymakers, economists, and regulators have long grappled with what steps could have been taken before 2007 that would have attenuated or even prevented the crisis—which triggered a global recession whose effects are felt even today. One possible measure would have been to require banks to have more capital.
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