How to spot a looming financial crisis

New research from Anjan Thakor, John E. Simon Professor of Finance, identifies conditions and activity in the banking industry that point to an impending financial crisis. In an interview with Steven Richmond editor-in-chief of BadCredit.org, Thakor discusses his new research:

Thakor identified several events that could mean a financial collapse is on its way:

  • A long period of low defaults and sustained profitability in banking
  • Politicians pressuring banks to lend more aggressively
  • Aggressive growth in bank balance sheets coupled with a lowering of capital ratios
  • Shortening debt maturity in bank borrowing
  • An asset price boom in any given sector banks lend to (i.e., real estate)
  • A financial system flush with liquidity, due in part to relaxed monetary policies

“The model is not about identifying the exact timing of the next crisis, but the pre-crisis conditions it identifies match what we had in the last crisis and previous ones,” Thakor said.

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Anjan Thakor

Thakor’s research paper, “Lending Booms, Smart Bankers and Financial Crises,” will be published in the American Economic Review 2015.

 

 

 

 

Image: Banking, Got Credit, Flickr Creative Commons

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