Global crisis

Thomas Gehrig, 25 May 2016

During normal operations, price discovery is an important feature of decentralised market trading. But the process can be distorted when markets are under great stress, such as during the run up to the collapse of Lehman Brothers in 2008. This column uses trading data from the days leading up to and following the collapse to show that price discovery at US stock exchanges remained remarkably efficient, even at the height of the turmoil.

Mark Cliffe, 19 May 2016

The idea that the global economy has entered a low-growth equilibrium appears to have gained acceptance. This column argues that this ‘New Normal’ never was, isn’t, and should be replaced by the ‘New Abnormal’. Far from being an equilibrium, the low growth recorded in the West since the nadir of the financial crisis in 2009 has only been achieved by progressively more aggressive and unprecedented monetary policy actions in response to a series of panic attacks in the financial markets. The aftershocks of the crisis are colliding with a series of structural changes which leave the global economy in a state of latent instability. 

Stijn Claessens, Nicholas Coleman, Michael Donnelly, 18 May 2016

Since the Global Crisis, interest rates in many advanced economies have been low and, in many cases, are expected to remain low for some time. Low interest rates help economies recover and can enhance banks’ balance sheets and performance, but persistently low rates may also erode the profitability of banks if they are associated with lower net interest margins. This column uses new cross-country evidence to confirm that decreases in interest rates do indeed contribute to weaker net interest margins, with a greater adverse effect when rates are already low.    

Filippo Ippolito, José-Luis Peydró, Andrea Polo, Enrico Sette, 10 May 2016

By providing liquidity to credit line borrowers and depositors, banks are potentially exposed to simultaneous runs on their assets and liabilities. This risk became a reality when the European interbank market froze in the summer of 2007. This column discusses the risk of double-bank runs, liquidity risk management by banks and the implications for the regulation of the financial sector, in particular Basel III. In 2007, banks with a larger exposure to the interbank market suffered a spike in drawdowns on their outstanding credit lines to firms, and were effectively exposed to a ‘double-run’. Importantly, this fragility was mitigated by active pre-crisis liquidity risk management by banks. 

Ester Faia, Beatrice Weder di Mauro, 30 April 2016

The default of key financial intermediaries like Lehmann Brothers, as well as the global banking panic following the 2007-2008 financial crises, set in motion the path for a fundamental restructuring of the global financial architecture. This column argues that the most pressing question has been how to design an efficient mechanism for resolution of significantly important banks. Bail-in, as opposed to bailout, has been the worldwide solution. But this presents issues for global banks, which must adhere to the rules in many different jurisdictions. 

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