Fragile by Design: The Political origin of banking Crises and Scarce Credit by Charles Calomiris and Stephen Haber

 


Politicians here and elsewhere have made their name by attacking bankers'
greed, other countries’ mistakes, globalisation, deregulation, central bankers'
blindness, too loose monetary policy, you name it-except usually themselves.
There is no denying that these issues matter and contributed to inflaming the
2008 crisis. All sorts of new ideas on how to make the system safer are
constantly being suggested and many being implemented- increasing capital
requirements; (forlorn) attempts to restrain bankers’ bonuses ;ring-fencing
retail and investment banking; abolishing proprietary dealing (the Volker
rule); increasing competition; or setting up proper resolution regimes for
' too big to fail' banks .


 
But are they appropriate?  What this excellent book shows is the importance of learning from other countries .We fret here about not having enough banking competition and yet Canada, which managed to sail through without an impact has a hugely concentrated banking system. We worry about universal banks and yet the book demonstrates how the abolition in 1999 of the Glass-Steagall Act which after the Great Depression in the US separated commercial and investment banking in fact provided an extra cushion to the banks when the crisis hit in 2008 allowing the easy absorption of failing investment banks by commercial banks. Loose money made things worse but wasn’t the cause of the crisis itself. And interestingly regulation of investment banks had been tightened before the crisis. There was plenty of regulation. The problem was that it was simply ineffectual.

There are three generally accepted theories on what might lead to a crisis. One is that a given banking structure might allow liquidity mismatches to develop and dangerously increase liquidity risk exposure. Another focuses on the inter-linkages- as each bank deals with its own balance sheet without taking into account the wider impact of its actions (externalities) on the system as a whole - in other words it fails to price any likely  ‘systemic’ risk. And the third is about human nature-people are myopic, acting with excessive optimism or excessive fear, with potentially disastrous consequences.

 All three exist across the globe and are real threats.  And yet banking crises have been absent in many countries despite these problems being evident. So it must be something else. And that something else, they conclude, is politics.

 Nowhere is that more obvious than in the US where the two academic authors teach . The subprime lending that was at the root of the financial crisis that engulfed us all was in fact the result of a coalition over the previous couple of decades of banks, urban active groups and influential politicians who achieved acceptance of a deal that brought about a dramatic decline in the underwriting standards of Fannie Mae and Freddie Mac, the two institutions mostly engaged in mortgage finance. The institutions had agreed to subsidise mortgages for the urban poor in exchange for larger government safety net subsidies in the form of low capital requirements. And the regulators were as the authors say, 'asleep at the wheel' while expansionary monetary policy encouraged citizens to take more risks with their borrowing.
 
The credit risk agencies to whom regulation was outsourced assumed that house prices, based on crises over the previous ten years, would never fall! Mortgage backed securities into which mortgages were turned and then sold in the secondary markets were perceived as risk free and they also required a lot less capital set against them. The market for Credit Default Swaps, basically insurance purchased by the originators of sub prime mortgage backed securities boomed on the assumption that the risk was low. The 'systemic' impact when borrowers could no longer meet repayments was huge.

Regulators could have intervened and raised capital ratios but they didn’t. And yet central bankers like the Fed and the Bank of England who failed to perceive the dangers are if anything getting even more powers thrust on them. Will a next crisis be averted? Perhaps if our regulators read this book."

Vicky Pryce's updated 'Greekonomics', is out in paperback (Biteback)

Arts and Entertainment
The Rolling Stones at the Roundhouse in London in 1971: from the left, Keys, Charlie Watts, Mick Taylor and Mick Jagger

Music ...featuring Eric Clapton no less
Arts and Entertainment
In the dock: Dot Branning (June Brown); Union boss claims EastEnders writers are paid less than minimum wage

TV

Arts and Entertainment
Roger Christian wrote and directed the 1980 Black Angel original, which was lost until 2011

film
Arts and Entertainment
Professor Green (Hand out press photograph provided by Camilla Gould)

TV
Arts and Entertainment

Game of Thrones reviewWarning: Spoilers aplenty
Arts and Entertainment
Matthew Healy of The 1975 performing on the Pyramid Stage at the Glastonbury Festival, at Worthy Farm in Somerset

music
Arts and Entertainment
booksThe Withnail and I creator, has a new theory about killer's identity
Have you tried new the Independent Digital Edition apps?
Arts and Entertainment

ebooksNow available in paperback
Arts and Entertainment

ebooks
Arts and Entertainment
tvDick Clement and Ian La Frenais are back for the first time in a decade
Arts and Entertainment
The Clangers: 1969-1974
tv
Arts and Entertainment
Rocky road: Dwayne Johnson and Carla Gugino play an estranged husband and wife in 'San Andreas'
film review
Arts and Entertainment
Nicole Kidman plays Grace Kelly in the film, which was criticised by Monaco’s royal family

film
Arts and Entertainment
Emilia Clarke could have been Anastasia Steele in Fifty Shades of Grey but passed it up because of the nude scenes

film
Arts and Entertainment
A$AP Rocky and Rita Ora pictured together in 2012

music
Arts and Entertainment
A case for Mulder and Scully? David Duchovny and Gillian Anderson in ‘The X-Files’

TV
Arts and Entertainment
Impressions of the Creative Community Courtyard within d3. The development is designed to 'inspire emerging designers and artists, and attract visitors'

architecture
Arts and Entertainment
Performers drink tea at the Glastonbury festival in 2010

GlastonburyWI to make debut appearance at Somerset festival

Arts and Entertainment
Lena Headey as Cersei Lannister

TV reviewIt has taken seven episodes for Game of Thrones season five to hit its stride

Arts and Entertainment
Jesuthasan Antonythasan as Dheepan

FilmPalme d'Or goes to radical and astonishing film that turns conventional thinking about immigrants on its head

Arts and Entertainment
Måns Zelmerlöw performing

Eurovision
Arts and Entertainment
Graham Norton was back in the commentating seat for Eurovision 2015

Eurovision
Arts and Entertainment
Richard Hammond, Jeremy Clarkson and James May on stage

TV
Arts and Entertainment
The light stuff: Britt Robertson and George Clooney in ‘Tomorrowland: a World Beyond’
film review
Arts and Entertainment
Reawakening: can Jon Hamm’s Don Draper find enlightenment in the final ‘Mad Men’?
tv reviewNot quite, but it's an enlightening finale for Don Draper spoiler alert
Arts and Entertainment
Breakfast Show’s Nick Grimshaw

Radio
Arts and Entertainment

Eurovision
Arts and Entertainment
'Youth' cast members Paul Dano, Jane Fonda, Harvey Keitel, Rachel Weisz, and Michael Caine pose for photographers at Cannes Film Festival
film
Arts and Entertainment
Adam West as Batman and Burt Ward and Robin in the 1960s Batman TV show

Comics
Latest stories from i100
Have you tried new the Independent Digital Edition apps?

ES Rentals

    Independent Dating
    and  

    By clicking 'Search' you
    are agreeing to our
    Terms of Use.

    Sepp Blatter resignation: The beginning of Fifa's long road to reform?

    Does Blatter's departure mean Fifa will automatically clean up its act?

    Don't bet on it, says Tom Peck
    Charles Kennedy: The baby of the House who grew into a Lib Dem giant

    The baby of the House who grew into a Lib Dem giant

    Charles Kennedy was consistently a man of the centre-left, dedicated to social justice, but was also a champion of liberty and an opponent of the nanny-state, says Baroness Williams
    Syria civil war: The harrowing testament of a five-year-old victim of this endless conflict

    The harrowing testament of a five-year-old victim of Syria's endless civil war

    Sahar Qanbar lost her mother and brother as civilians and government soldiers fought side by side after being surrounded by brutal Islamist fighters. Robert Fisk visited her
    The future of songwriting: How streaming is changing everything we know about making music

    The future of songwriting

    How streaming is changing everything we know about making music
    William Shemin and Henry Johnson: Jewish and black soldiers receive World War I Medal of Honor amid claims of discrimination

    Recognition at long last

    Jewish and black soldiers who fought in WWI finally receive medals after claims of discrimination
    Beating obesity: The new pacemaker which helps over-eaters

    Beating obesity

    The new pacemaker which helps over-eaters
    9 best women's festival waterproofs

    Ready for rain: 9 best women's festival waterproofs

    These are the macs to keep your denim dry and your hair frizz-free(ish)
    Cycling World Hour Record: Nervous Sir Bradley Wiggins ready for pain as he prepares to go distance

    Wiggins worried

    Nervous Sir Bradley ready for pain as he prepares to attempt cycling's World Hour Record
    Liverpool close in on Milner signing

    Liverpool close in on Milner signing

    Reds baulk at Christian Benteke £32.5m release clause
    On your feet! Spending at least two hours a day standing reduces the risk of heart attacks, cancer and diabetes, according to new research

    On your feet!

    Spending half the day standing 'reduces risk of heart attacks and cancer'
    With scores of surgeries closing, what hope is there for the David Cameron's promise of 5,000 more GPs and a 24/7 NHS?

    The big NHS question

    Why are there so few new GPs when so many want to study medicine?
    Big knickers are back: Thongs ain't what they used to be

    Thongs ain't what they used to be

    Big knickers are back
    Thurston Moore interview

    Thurston Moore interview

    On living in London, Sonic Youth and musical memoirs
    In full bloom

    In full bloom

    Floral print womenswear
    From leading man to Elephant Man, Bradley Cooper is terrific

    From leading man to Elephant Man

    Bradley Cooper is terrific