Tag: financial crisis



He’s against breaking up big banks. He doesn’t favor a return to Glass-Steagall’s separation of commercial and investment banking. And he’d like to see most of the Dodd-Frank Act dismantled. William Cohan made it clear at the second annual Wealth & Asset Management Conference at Olin that he’s against tight regulation of the finance industry where he spent most of his career.

Cohan was a headline speaker at the conference sponsored by the Wells Fargo Advisors Center for Finance and Accounting Research held Aug. 22-23. Cohan’s current career involves writing books about how big finance works behind the headlines. Cohan discussed his latest work, Why Wall Street Matters, with Rich Ryffel, senior lecturer in finance.

So, how would Cohan propose preventing the next financial crisis if regulation won’t help? David Nicklaus at The St. Louis Post-Dispatch covered their conversation in his Aug. 25 column:

Cohan proposes that the top 500 or so executives at each big bank be required to pledge their entire net worth as backing for the firm’s liabilities. They could still earn bonuses and stock options when things were going well, but another bad bet like subprime mortgages could cost them everything.

“It’s in the DNA of Wall Street to have your own skin in the game,” Cohan says. “You’re not going to take Goldman Sachs or Wells Fargo private, but my idea would recreate some of the old partnership structure.”




As the world learned in 2008, a global financial crisis can happen when economists least expect (or predict) it. But according to Gary Gorton, finance professor at Yale’s School of Management, it will happen again. He estimates the next crisis will come in 10 to 15 years. Gorton shared his analysis of the 2008 financial crisis at an event sponsored by the Wells Fargo Advisors Center for Finance and Accounting Research at Olin, Aug. 16.

Gorton will address the Finance Theory Group Summer School, meeting at Olin this week, at 9 a.m., Friday, Aug. 18, in Emerson Auditorium, Knight Hall. His topic will be: “The Private Money View of Financial Crises.”

Gorton’s 2010 book, Misunderstanding Financial Crises, Why We Don’t See Them Coming, provides historical context for understanding the 2008 financial crisis and why economists and policy makers need to recognize that crises are inevitable and inherent to our financial system. To those who thought that a crisis could not happen again in the US after the Great Depression, Gorton is blunt: “That economists did not think such a crisis could happen in the United States was an intellectual failure.”

Unlike the 1929 crash with bank runs like the scene in the Frank Capra film, “It’s A Wonderful Life,” the causes of the 2008 crisis were less visible. Cloaked in electronic trading, complex financial ‘innovations’, and unregulated derivative securities trading within the Shadow Banking system, Gorton said economists were blind to what was really happening in the financial markets.

Gorton points to the lack of data available from financial institutions as a major handicap for economists and policy makers who need to track activity to more accurately understand the markets and see signs of crisis before it’s too late. Gorton calls for a new information infrastructure to be built by the Office of Financial Research established under the Dodd-Frank legislation. He argues collecting and sharing data would help regulators as well as economists to more accurately measure risk and liquidity in the markets.

Gary Gorton and Rich Ryffel, Olin Senior Lecturer in Finance

Bio
Gary B. Gorton is The Frederick Frank Class of 1954 Professor of Finance at the Yale School of Management, which he joined in August 2008. Prior to joining Yale, he was the Robert Morris Professor of Banking and Finance at The Wharton School of the University of Pennsylvania, where he taught from 1983 to 2008. Dr. Gorton has done research in many areas of finance and economics, including both theoretical and empirical work. He is the author of Slapped by the Invisible Hand: The Panic of 2007 (Oxford University Press) and Misunderstanding Financial Crises (Oxford University Press).

Dr. Gorton has consulted for the U.S. Board of Governors of the Federal Reserve System, various U.S. Federal Reserve Banks, the Bank of England, the Bank of Japan, and the Central Bank of Turkey. He was a consultant to AIG Financial Products from 1996 to 2008.

Dr. Gorton received his doctorate in economics from the University of Rochester. In the field of economics, he received master’s degrees at the University of Rochester and Cleveland State University, and also received a master’s degree in Chinese Studies from the University of Michigan.




New research from Olin may redeem and restore the word “bailout” that became a dirty word during the 2008 financial crisis, according to Dave Nicklaus, columnist at the St. Louis Post-Dispatch.

“Jennifer Dlugosz, assistant professor of finance at the Olin Business School, and two co-authors looked at a pair of Federal Reserve programs that were pumping $221 billion a day into banks at the height of the crisis.

What they found should be heartening for the Fed and its defenders: For each dollar in emergency support, large banks lent an additional 60 cents and small banks lent 30 cents.”    Link to St. Louis Post Dispatch.

Nicklaus also notes, “The names of banks that took emergency loans used to be secret, but two news organizations sued and forced the Fed to disclose the recipients. Dlugosz believes her study is the first to use the resulting data.”




During the financial crisis from 2007-09, the U.S. Federal Reserve took drastic steps to ensure that banks had access to liquidity so they could continue lending. It extended the maturity of loans available through its Discount Window from overnight to 90 days, and established the Term Auction Facility, which offered similar funding through a series of special auctions.  Banks borrowed from these facilities to the tune of a staggering $221 billion per day during the crisis.

For the first time ever, Olin Professor Jennifer Dlugosz and her co-researchers, were able to examine data from the crisis to show how the Fed can effectively assist banks in times of financial uncertainty. No matter the program or the bank size, this infusion of liquidity spurred lending that ultimately reached homes and businesses, thereby benefiting the economy, the researchers found in their analysis.

Jennifer Dlugosz, assistant professor of finance at Olin Business School

Jennifer Dlugosz, assistant professor of finance at Olin Business School

“Perhaps contrary to popular beliefs, our research shows that the Fed’s actions were effective in encouraging banks to lend. This suggests that the credit crunch we witnessed could have been a lot worse in the absence of these facilities,” said Jennifer Dlugosz, assistant professor of finance at Olin Business School, and former economist at the Board of Governors of the Federal Reserve System.

Dlugosz — along with co-authors Allen Berger, professor of banking and finance at the University of South Carolina, Lamont Black, assistant professor of finance at DePaul University, and Christa Bouwman, associate professor of finance at Texas A&M University — analyzed data about the banks that took part in the Fed’s financial crisis programs. In the past, the information had not been released due to concerns about the stigma associated with accepting the assistance. However, the data became public in 2010 after media outlets Bloomberg News and Fox Business Network filed a Freedom of Information Act request.

“No one has been able to look at this question before, because the data weren’t available,” Dlugosz said. “This is the first time in history that detailed data on the individual loans has been made public.”

During the course of their research, Dlugosz and her co-authors found a total of 20 percent of small U.S. banks and 62percent of bigger U.S. banks — more than 2,000 in all — used the Discount Window or the Term Auction Facility at some point during the crisis. The access to liquidity increased bank lending of almost all types. Meanwhile, they found no evidence that banks were making riskier loans.

“We examined whether or not the Discount Window and the Term Auction Facility helped encourage banks to lend during the crisis,” Dlugosz said. “We find that it did. It looks like one extra dollar in liquidity support from the Fed to a bank results in somewhere between 30 to 60 cents in additional lending by the bank, depending on its size.

“It wasn’t obvious at the time whether this was going to work. The Fed is a lender of last resort for banks. We already had some idea it was effective in preventing bank failures, but this paper also shows us it can also be useful in encouraging banks to lend.”

The research paper was recently accepted for publication by the Journal of Financial Intermediation.

By: Erika Ebsworth-Goold, WashU The Source



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.

Thakor_hs

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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