Pierre-Cyrille Hautcoeur, Angelo Riva, Eugene White, 02 July 2014

The key challenge for lenders of last resort is to ameliorate financial crises without encouraging excessive risk-taking. This column discusses the lessons from the Banque de France’s successful handling of the crisis of 1889. Recognising its systemic importance, the Banque provided an emergency loan to the insolvent Comptoir d’Escompte. Banks that shared responsibility for the crisis were forced to guarantee the losses, which were ultimately recouped by large fines – notably on the Comptoir’s board of directors. This appears to have reduced moral hazard – there were no financial crises in France for 25 years.

Friðrik Már Baldursson, Richard Portes, 06 January 2014

In 2008, Icelandic banks were too big to fail and too big to save. The government’s rescue attempts had devastating systemic consequences in Iceland since – as it turned out – they were too big for the state to rescue. This column discusses research that shows how this was a classic case of banks gambling for resurrection.

Kaushik Basu, Joseph Stiglitz, 02 January 2014

The Eurozone crisis exposed weaknesses in the Eurozone’s design. This column – by Nobelist Joe Stiglitz and World Bank Chief Economist Kaushik Basu – argues that the Eurozone’s financial architecture can be improved by amending the Treaty of Lisbon to permit appropriately structured cross-country liability for sovereign debt incurred by EZ members.

Thomas Huertas, María Nieto, 19 September 2013

To end moral hazard, investors, not taxpayers, should bear the loss associated with bank failures. Recently, the EU took a major step in this direction with the Banking Recovery and Resolution Directive. This column argues that this is a game changer. It assures through the introduction of the bail-in tool that investors, not taxpayers, will primarily bear the cost of bank failures, and it opens the door to resolving banks in a manner that will not significantly disrupt financial markets.

Eduardo Cavallo, Eduardo Fernandez-Arias, 17 October 2012

The Eurozone body politic seems to be slowly learning the lessons for crisis management. This column argues that Latin America’s decades of financial crisis can provide key insights for Europe.

Charles Wyplosz, 26 September 2011

Last weekend, Eurozone policymakers were shaken into admitting that something more needs to be done to save the Eurozone and avoid a major crisis that would reverberate around the world. This column proposes a three-step solution to finally end the crisis.

Hans Gersbach, 02 April 2011

When banks failed, the government paid up. But the bankers responsible kept their bonuses from the years of excess. This column argues for “crisis contracts”. Such contracts require that, in the event of a crisis, bank managers forfeit a portion of their past earnings to rescue the banking system.

Russell Cooper, Hubert Kempf, 18 February 2011

Before the surprising 2007 collapse of Northern Rock, it was taken for granted that bank runs were things of the past. But their return and the modifications of deposit insurance schemes lead many to question the credibility of the government’s commitment. What makes a run on a bank? And when should the government intervene? This column provides some answers.

Federico Etro, 04 November 2010

Looking at the contracts for large oil paintings in Italy (1550-1750), this column finds evidence of strong competition between painters. Contracts were structured to address moral hazard problems, and prices closely reflected demand and supply conditions in an integrated market.

John Van Reenen, 04 May 2010

How can financial regulation be fixed to avoid another global crisis? This column argues that the “heads, I win; tails, society loses” moral hazard in the financial sector has to stop. To do this, policymakers must make bankruptcy credible. If a company has too much debt and becomes insolvent, it should suspend payments and its shareholders and creditors should lose their money.

Brian Bell, John Van Reenen, 03 May 2010

The global crisis has sharpened the media spotlight and political debate on bankers’ bonuses. Focusing on evidence from the UK, this column argues that to avoid excessive risk-taking in the financial sector and exploitation of moral hazard, bankers’ bonuses should be based on risk-adjusted long-run performance or be subject to “clawback” if future performance declines.

Stefano Micossi, 16 March 2010

Policymakers and commentators have suggested that large banks should be broken up. This column argues that such an idea risks the very existence of a global financial system. It outlines an alternative framework in which deposit insurance should be covered by banks not taxpayers, banks should not be guaranteed a bailout, and regulators should be mandated to step in when the warning signs begin.

Ricardo Caballero, 17 November 2009

How should governments respond to sudden failure of the financial system? This column says that it is neither credible nor desirable to refuse to assist the private sector in financial crises. It makes the case for massive provision of credible public insurance and guarantees to financial transactions and balance sheets – a financial defibrillator to respond to sudden financial arrest.

Manolis Galenianos, Nicola Persico, 08 June 2009

Drugs cause many social problems, but so does the drug war. This column suggests a novel solution that emphasises the risk of rip-offs in street sales – reducing the penalties applied to those who sell low-purity drugs. Leveraging moral hazard this way would effectively raise the wholesale price of drugs, undermining the drug market.

Michael Dooley, Peter Garber, 21 March 2009

This column argues that current account imbalances, easy US monetary policy, and financial innovation are not the causes to blame for the global crisis. It says that attacking Bretton Woods II as a major cause of the crisis is an attack on the world trading system and a sure way to metastasise the crisis in the global financial system into a crisis of the global economic system.

Giovanni Dell'Ariccia, Deniz Igan, Luc Laeven, 04 February 2008

Over the last decade, the market for mortgage-backed securities has expanded dramatically, evolving from a small niche segment to a major portion of the overall U.S. mortgage market. The authors of CEPR DP6683 study the relationship between this recent boom and current delinquencies in the subprime mortgage market. Specifically, they analyze the extent to which this relationship can be explained by a decline in credit standards and excessive risk taking by lenders that is unrelated to improvements in underlying economic fundamentals.

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