US & EU Linkages: How did they contribute to the crisis?
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US & EU Linkages: How did they contribute to the crisis?
- 1. The current banking crisis (EU and US linkages) Dr Stephen Kinsella, UL | stephenkinsella.net Summer School Lecture, August 19th, 2009
- 3. Today
- 4. 3 Ideas.
- 5. History of 1/3 regulation matters most in explaining crisis.
- 6. US/EU Linkages much stronger 2/3 than in previous crises, very bad thing.
- 7. Implementation of regulation will not be effective 3/3 enough to mitigate crisis of 2020’s.
- 8. But before all that...
- 9. Where are we now?
- 10. [US/EU GDP per capita, 1990-2007]
- 13. Oh Dear. How did this happen?.
- 14. History of 1/3 regulation matters most in explaining crisis.
- 15. History
- 16. Current vs proposed regulatory changes EU See ft.com, http://ec.europa.eu/index_en.htm for details
- 17. Current vs proposed regulatory changes EU
- 18. Current vs proposed regulatory changes US
- 19. Current vs proposed regulatory changes US
- 20. US/EU Linkages much stronger 2/3 than in previous crises, very bad thing.
- 21. 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
- 22. 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.
- 23. Next Slide Shows Merger Activity among banks, 1990-2004
- 24. 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
- 26. Implementation of regulation will not be effective 3/3 enough to mitigate crisis of 2020’s.
- 27. [Minsky]
- 28. Minsky Moments Idea: Credit markets will breed their own reversal
- 29. 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.
- 30. Minsky cycle Five stages in Minsky’s model of the credit cycle: 1. displacement, 2. boom, 3. euphoria, 4. profit taking, and 5. panic.
- 31. 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
- 32. Crises?
- 33. The current banking crisis (EU and US linkages) Dr Stephen Kinsella, UL | stephenkinsella.net Summer School Lecture, August 19th, 2009