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


 4,00...
Increased Market concentration by financial sector
        Figure 3: Share of Assets in Each Sector Controlled by 10 Larges...
Next Slide Shows
Merger Activity among
  banks, 1990-2004
1990-1995       1996           1997             1998          1999          2000          2001          2002       2004
Ci...
[Linkages matter]
Implementation of
      regulation will not
         be effective
3/3       enough to
       mitigate crisis of
          ...
[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/Dep...
Minsky cycle
  Five stages in Minsky’s model of the credit
  cycle:
1. displacement,
2. boom,
3. euphoria,
4. profit taking...
Leverage Cycles
In a crisis, collateral rates matter
In 2006, average leverage was 16:1
Meaning: buyers paid down only $15...
Crises?
The current banking crisis
  (EU and US linkages)
  Dr Stephen Kinsella, UL | stephenkinsella.net
   Summer School Lecture...
US & EU Linkages: How did they contribute to the crisis?
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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. 1. The current banking crisis (EU and US linkages) Dr Stephen Kinsella, UL | stephenkinsella.net Summer School Lecture, August 19th, 2009
  2. 2. Today
  3. 3. 3 Ideas.
  4. 4. History of 1/3 regulation matters most in explaining crisis.
  5. 5. US/EU Linkages much stronger 2/3 than in previous crises, very bad thing.
  6. 6. Implementation of regulation will not be effective 3/3 enough to mitigate crisis of 2020’s.
  7. 7. But before all that...
  8. 8. Where are we now?
  9. 9. [US/EU GDP per capita, 1990-2007]
  10. 10. See http://research.stlouisfed.org/fred2/series/M2?cid=29
  11. 11. http://research.stlouisfed.org/fred2/graph/?s[1][id]=EXUSEU
  12. 12. Oh Dear. How did this happen?.
  13. 13. History of 1/3 regulation matters most in explaining crisis.
  14. 14. History
  15. 15. Current vs proposed regulatory changes EU See ft.com, http://ec.europa.eu/index_en.htm for details
  16. 16. Current vs proposed regulatory changes EU
  17. 17. Current vs proposed regulatory changes US
  18. 18. Current vs proposed regulatory changes US
  19. 19. US/EU Linkages much stronger 2/3 than in previous crises, very bad thing.
  20. 20. 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
  21. 21. 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.
  22. 22. Next Slide Shows Merger Activity among banks, 1990-2004
  23. 23. 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
  24. 24. [Linkages matter]
  25. 25. Implementation of regulation will not be effective 3/3 enough to mitigate crisis of 2020’s.
  26. 26. [Minsky]
  27. 27. Minsky Moments Idea: Credit markets will breed their own reversal
  28. 28. 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.
  29. 29. Minsky cycle Five stages in Minsky’s model of the credit cycle: 1. displacement, 2. boom, 3. euphoria, 4. profit taking, and 5. panic.
  30. 30. 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
  31. 31. Crises?
  32. 32. The current banking crisis (EU and US linkages) Dr Stephen Kinsella, UL | stephenkinsella.net Summer School Lecture, August 19th, 2009
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