Balancing The Banks

The financial crisis that began in 2007 in the US swept the world, producing substantial bank failures and forcing unprecedented state aid for the crippled global financial system. This book draws critical lessons from the causes of the crisis and proposes important regulatory reforms.

The global financial crisis produced an important agreement among regulators in 2010–11 to raise capital requirements for banks to protect them from insolvency in the event of another emergency. In this book, William R. Cline, a leading expert on the global financial system, employs sophisticated economic models to analyze whether these reforms, embodied in the Third Basel Accord, have gone far enough. He calculates how much higher bank capital reduces the risk of banking crises, providing a benefit to the economy. On the cost side, he estimates how much higher capital requirements raise the lending rate facing firms, reducing investment in plant and equipment and thus reducing output in the economy. Applying a plausible range of parameters, Cline arrives at estimates for the optimal level of equity capital relative to total bank assets. This study also challenges the recent "too much finance" literature, which holds that in advanced countries banking sectors are already too large and are curbing growth.

This paper shows that banks use accounting discretion to overstate the value of distressed assets. Banks' balance sheets overvalue real estate-related assets compared to the market value of these assets, especially during the U.S. mortgage crisis. Share prices of banks with large exposure to mortgage-backed securities also react favorably to recent changes in accounting rules that relax fair-value accounting, and these banks provision less for bad loans. Furthermore, distressed banks use discretion in the classification of mortgage-backed securities to inflate their books. Our results indicate that banks' balance sheets offer a distorted view of the financial health of the banks.

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Introduction : the new economics of debt and financial fragility /Moritz Schularik --Part 1. Finance unbound : the rise of finance and the economy.How to think about finance /Atif Mian ; comment by Karen Dynan --Reconsidering the costs and benefits of debt booms for the economy /Emil Verner ; comment by Holger Mueller --Part 2. Risk-taking : incentives, investors, institutions.Are bank CEO's to blame? /Rüdiger Fahlenbrach ; comment by Sameul G. Hanson --A new narrative of investors, subprime lending, and the 2008 crisis /Stefania Albanesi ; comment by Fernando Ferreira --Bank capital before and after financial crises /Òscar Jordà, Björn Richter, Moritz Schularick, and Alan M. Taylor ; comment by Anna Kovner --Part 3. Mispricing risks : credit booms and risk premia.Beliefs and risk-taking /Alessia de Stefani and Kaspar Zimmermann ; comment by Yueran Ma --A new approach to measuring banks' risk exposure /Juliane Begenau ; comment by Nina Boyarchenko --Is risk mispriced in credit booms? /Tyler Muir --Part 4. Financial crises : reconsidering the origins and consequences.Historical banking crises : a new database and a reassessment of their incidence and severity /Matthew Baron and Daniel Dieckelmann ; comment by Mark Carlson --Was the U.S. Great Depression a credit boom gone wrong? /Natascha Postel-Vinah ; comment by Eugene N. White --Sectoral credit booms and financial stability /Kärsten Muller ; comment by Orsola Costantini.

Bank Risk Management in Developing Economies: Addressing the Unique Challenges of Domestic Banks provides an up-to-date resource on how domestically-based banks in emerging economies can provide financial services for all economic sectors while also contributing to national economic development policies. Because these types of bank are often exposed to risky sectors, they are usually set apart from foreign subsidiaries, and thus need risk models that foreign-based banks do not address. This book is the first to identify these needs, proposing solutions through the use of case studies and analyses that illustrate how developing economic banking crises are often rooted in managing composite risks. The book represents a departure from classical literature that focuses on assets, liabilities, and balance sheet management, by which developing economy banks, like their counterparts elsewhere, have not fared well. Contains fifty cases that reinforce risk management best practices Provides a consistent chapter format that includes abstract, keywords, learning focus, and outcomes Summaries, questions, and glossaries conclude each chapter

In this thought-provoking book, Jonathan McMillan dissects banking to reveal its inner workings. He cuts through the complexity of modern finance and explains how banking almost crashed our financial system. Banking is broken, and McMillan reveals why we can no longer fix it. The digital revolution turns out to be the game changer that calls for the end of banking. But McMillan refrains from merely pointing out flaws. Building on economic research and a rigorous analytical approach, he goes on to provide an innovative blueprint for a modern financial system. The End of Banking transforms our understanding of the financial system. It identifies the root cause of today's problems with banking and presents a solution that stands out against existing reform proposals.