Jean-Pierre Danthine, 21 November 2017

There is little doubt that one of the main causes of the Global Crisis was excessive risk-taking by large international financial institutions. This column argues that the combination of very high leverage and limited liability continues to incentivise risky behaviour by bankers. Dealing with this problem requires the alignment of bankers’ incentives with those of society, rather than of shareholders. Deferred compensation in the form of contingent convertibles presents one promising strategy.

Charles Abuka, Ronnie Alinda, Camelia Minoiu, José-Luis Peydró, Andrea Presbitero, 29 June 2017

Existing studies suggest that the effects of monetary policy in developing countries on credit and the real economy are weak. This column challenges this view using rich loan-level credit register data from Uganda. It shows that monetary policy tightening significantly reduces credit supply – especially for banks with greater leverage and sovereign debt exposure – and identifies spillovers on inflation and economic activity. The effects are larger in more financially developed areas, highlighting the importance of financial development for policy effectiveness.

Laura Alfaro, Gonzalo Asis, Anusha Chari, Ugo Panizza, 13 June 2017

Leverage levels in emerging market firms rose dramatically in the aftermath of Global Crisis. This column examines whether concerns of a repeat of the Asian financial crisis, which was largely attributed to corporate financial roots, are justified. While firm financial fragility is more widespread, it is less severe than in the period preceding the Asian Financial Crisis. However, certain large firms with high levels of foreign currency leverage are a potential key source of vulnerability in the transmission of adverse shocks such as exchange rate depreciations. 

Nikolaos Papanikolaou, Christian Wolff, 06 December 2015

In the years running up to the global crisis, the banking sector was marked by a high degree of leverage. Using US data, this column shows how, before the onset of the crisis, banks accumulated leverage both on and, especially, off their balance sheets. The latter activities saw an increase in maturity mismatch, raised the probability of bank runs, and increased both individual bank risk and systemic risk. These findings support the imposition of an explicit off-balance sheet leverage ratio in future regulatory frameworks.

Benjamin Nelson, Gabor Pinter, Konstantinos Theodoridis, 16 March 2015

There has been an extensive debate over whether central banks should raise interest rates to ‘lean against’ the build-up of leverage in the financial system. This column reports on empirical evidence showing that, in contrast to the conventional view, surprise monetary contractions have tended to increase shadow bank asset growth, rather than reduce it in the US. Monetary policy had the opposite effect on commercial bank asset growth. These findings cast some doubt on the idea that monetary policy could be used to “get in all the cracks” of the financial system in a uniform way.

Thorsten Beck, 10 November 2014

The ECB has published the results of its asset quality review and stress tests of Eurozone banks. This column argues that, while this process had clear shortcomings, it still constitutes a huge improvement over the three previous exercises in the EU. Nevertheless, the banking union is far from complete, and the biggest risk now is complacency. A long-term reform agenda awaits Europe.

Charles Goodhart, Philipp Erfurth, 03 November 2014

There has been a long-term downward trend in labour’s share of national income, depressing both demand and inflation, and thus prompting ever more expansionary monetary policies. This column argues that, while understandable in a short-term business cycle context, this has exacerbated longer-term trends, increasing inequality and financial distortions. Perhaps the most fundamental problem has been over-reliance on debt finance. The authors propose policies to raise the share of equity finance in housing markets; such reforms could be extended to other sectors of the economy.

John Graham, Mark Leary, Michael Roberts, 06 May 2014

During the recent financial crisis, not much attention has been paid to the indebtedness of non-financial corporations, as little is known about what drives their financing. This column looks at financial policies of non-financial corporations over the last century. It shows evidence that a primary factor affecting the amount of corporate borrowing is the amount of borrowing by the government. Government borrowing crowds out the ability of the corporate sector to borrow. Thus, policymakers should be cautious in altering government policies in an attempt to reduce corporate debt usage.

Vincent O'Sullivan, Stephen Kinsella, 17 December 2011

The capital shortfall at EU banks is 8% higher than originally thought, according to the latest assessment from the European Banking Authority. This column examines the evolution of loan-to-deposit ratios in big European banks. It says banks have been buying back their debt securities, hoarding profits, limiting bonuses, and deleveraging. However, write-downs of sovereign debt have largely offset these efforts.

Sergi Lanau, 19 July 2011

The global crisis has forced a root-and-branch rethink of financial regulation. This column discusses the international dimensions. It presents new evidence to suggest that non-banks tend to borrow more abroad when domestic regulation is tight.

Thomas Philippon, Virgiliu Midrigan, 16 May 2011

In the recent US recession, those states which saw the biggest increases in household leverage during the credit boom suffered greatest hits to output and employment rates. The authors of CEPR DP 8381 try to understand this anomaly with a new model of a cash-in-advance economy, where economic activity is highly sensitive to credit conditions. They argue that this framework supports the use of expansionary monetary policy to mitigate recessions.

Romain Rancière, Michael Kumhof, 04 February 2011

Of the many origins of the global crisis, one that has received comparatively little attention is income inequality. This column provides a theoretical framework for understanding the connection between inequality, leverage and financial crises. It shows how rising inequality in a climate of rising consumption can lead poorer households to increase their leverage, thereby making a crisis more likely.

James Walsh, Gaston Gelos, Robert Rennhack, S. Pelin Berkman, 28 March 2010

Despite the global reach of the financial crisis, some countries fared better than others. This column argues that this was due to differences in trade or financial openness, underlying vulnerabilities to external forces, or the strength of their economic policies.

Daniel Gros, 26 January 2010

Did allowing financial institutions to become “too big” play a role in the financial crisis? This column argues that being “too interconnected” is also a factor, and that US accounting standards should recognise gross derivatives exposure on the balance sheet to make this interconnectedness, and the resulting exposure, clear.

Daniel Gros, Stefano Micossi, Jacopo Carmassi, 13 August 2009

Why is there so much disagreement about the causes of the crisis? This column says that lax monetary policy and excessive leverage are to blame. It argues that many alleged causes are simply symptoms of these policy errors. If that is correct, then the recommended corrective is remarkably simple – there is no need for intrusive regulatory measures constraining non-bank intermediaries and innovative financial instruments.

Francesco Columba, Wanda Cornacchia, Carmelo Salleo, 01 July 2009

As discussed in the first column in this series, greater leverage and incentives encouraging managers to take excessive risks drove a pro-cyclical new financial accelerator. This column discusses policy options to keep those forces in check.

Francesco Columba, Wanda Cornacchia, Carmelo Salleo, 30 June 2009

The current crisis has made obvious the power of the financial sector to amplify business cycle dynamics. This column, the first half of a series, focuses on how leverage, capital regulation, and managers’ incentives contributed to the crisis.

Axel Leijonhufvud, 12 January 2009

This column explains how lack of regulation and failed monetary policy caused the failure of financial markets and then illustrates the banking crisis with simple arithmetic. It concludes that the automatic adjustment of free markets is ineffective in producing a recovery from this recession.

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