The current banking crisis
(EU and US linkages)
Dr Stephen Kinsella, UL | stephenkinsella.net
Summer School Lecture, August 19th, 2009

Today

3 Ideas.

History of
1/3 regulation matters
most in
explaining crisis.

US/EU Linkages
much stronger
2/3 than in previous
crises, very bad
thing.

Implementation of
regulation will not
be effective
3/3 enough to
mitigate crisis of
2020’s.

But before all that...

Where are we now?

[US/EU GDP per capita, 1990-2007]

See http://research.stlouisfed.org/fred2/series/M2?cid=29

http://research.stlouisfed.org/fred2/graph/?s[1][id]=EXUSEU

Oh Dear. How did this
happen?.

History of
1/3 regulation matters
most in
explaining crisis.

History

Current vs proposed regulatory changes
EU
See ft.com, http://ec.europa.eu/index_en.htm for details

Current vs proposed regulatory changes
EU

Current vs proposed regulatory changes
US

Current vs proposed regulatory changes
US

US/EU Linkages
much stronger
2/3 than in previous
crises, very bad
thing.

Figure 2: International Debt Securities, 1987-2004
Dollars in billions
14,000
12,000
10,000
8,000
6,000
4,000
2,000
0
1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
Source: Bank for International Settlements.
The financial services industry—firms, markets, and products—have been
an integral part of the globalization trend. At present, firms have a greater
capacity and increased regulatory freedom to cross borders, creating
markets that either eliminate or substantially reduce the effect of national
See http://www.ecb.int/stats/services/latest/html/index.en.html
boundaries. U.S.-owned financial services firms have increased their

Increased Market concentration by financial sector
Figure 3: Share of Assets in Each Sector Controlled by 10 Largest Firms, 1996-2002
Percent
65
60
55
50
45
40
35
30
25
20
15
10
5
0
1996 1997 1998 1999 2000 2001 2002
Securities firms
Property/casualty insurance
Life insurance
Commercial banks
Savings institutions
Source: TowerGroup.
Large financial institutions have consolidated by merging with or
acquiring other companies in the same
line of business.

Next Slide Shows
Merger Activity among
banks, 1990-2004

1990-1995 1996 1997 1998 1999 2000 2001 2002 2004
Citicorp
Citigroup
European American Bank Citigroup
Universal Bank, N.A.
Manufacturers Hanover
Chemical Banking
Chemical Banking Chase Manhattan
Chase Manhattan J.P. Morgan Chase & Co.
J.P. Morgan & Co. J.P. Morgan
American National Bank and Trust Company of Chicago Chase & Co.
Banc One Bank One
First Commerce
Bank One
First Chicago
First Chicago NBD
NBD Bancorp First Chicago NBD
American National
BankAmerica
Continental Bank BankAmerica
Security Pacific Bancorporation Northwest
BankAmerica
Boatmen's National Bank of St. Louis
C & S/Sovran NationsBank
NationsBank
NationsBank
Maryland National Bank
NCNB National Bank of Florida
Bank of
Barnett Banks
America
BancBoston Holdings
BankBoston
Bay Banks
NatWest Bank National Association
FleetBoston Financial
Fleet Financial Group
Fleet Financial Group
Bank of New England Fleet Financial Group FleetBoston Financial
Shawmut
Summit Bancorp
Summit
UJB Financial
United States National Bank of Oregon
First Bank System
U.S. Bancorp
U.S. Bancorp
U.S. Bancorp
Firstar
Firstar
Mercantile Bancorporation
First Interstate Bancorp
Wells Fargo & Company Wells Fargo
Wells Fargo & Company
& Company
Norwest Holding Company
First Fidelity
First Union
First Union
Signet First Union
Philadelphia National Bank
Corestates Financial
Corestates Financial Corestates Financial Wachovia
Meridian Bank
Central Fidelity National Bank
Wachovia
Wachovia

[Linkages matter]

Implementation of
regulation will not
be effective
3/3 enough to
mitigate crisis of
2020’s.

[Minsky]

Minsky Moments
Idea: Credit markets will
breed their own reversal

Minsky Moments
1. How?
1. Cheap interest rates lead to increased lending.
2. This leads to increases in leverage (Loan/Deposit
ratio).
3. Perverse incentives breed dodgy lending via
financial innovations (Junk bonds/CDOS/etc)
ensues.
4. Something changes, dodgy loans default, banks
fail, unless they get bailed out by Big Bank/Big
Govt.

Minsky cycle
Five stages in Minsky’s model of the credit
cycle:
1. displacement,
2. boom,
3. euphoria,
4. profit taking, and
5. panic.

Leverage Cycles
In a crisis, collateral rates matter
In 2006, average leverage was 16:1
Meaning: buyers paid down only $150 billion
and borrowed the other $2.35 trillion.
See “The Leverage Cycle by John
Geanakoplos”, http://cowles.econ.yale.edu/P/
cd/d17a/d1715.pdf

Crises?

The current banking crisis
(EU and US linkages)
Dr Stephen Kinsella, UL | stephenkinsella.net
Summer School Lecture, August 19th, 2009