Financial Regulation

Major financial crises all follow the same scenario. There is an initial unexpected shock which weakens part of the financial system. The shock can have many different origins (real estate crisis, bursting of a financial bubble, rise in interest rates, etc.). Given enough time, balance sheets could be repaired, perhaps with help from governments, but panic sets in and creditors fail to renew credit lines to weakened institutions. When institutions bear too much liquidity risk (i.e. financing long-term assets with […]

This banking crisis has two origins. The first is well understood and the second is not. The most obvious is that some (many?) banks have not properly managed their interest rate risk. The second, less obvious, reason is the flawed framework for dealing with failing institutions put in place after the 2008-2009 crises. We explain in this paper how this framework is creating a death spiral in the price of shares issued by banks. If regulators understand and correct their […]

Diamond and Dybvig (1983) is one of the most frequently quoted papers in financial economics. Thus, it may seem natural that forty years later the authors finally receive the “Nobel prize”. Yet this article is an example of financial economics at its worst. A simplistic mathematical formalization leads to erroneous conclusions that provide the theoretical foundation for inadequate financial regulations. See Why Diamond and Dybvig (1983) is a particularly flawed and dangerous paper. Diamond et Dybvig (1983) est l’un des […]

20 March 2020 Coronavirus infects the financial sector thanks to three deep mistakes made after the subprime crisis. The financial impact of the coronavirus may seem disproportionate. Since the start of the year, around twenty trillion dollars have been wiped out in the global equity and bond markets. Taking into account the huge help coming from governments around the world, it is difficult to imagine a scenario in which the private sector would lose such a large sum of money […]

“In 42 years on the financial markets, I have seen many crises. They are rarely the same. However, the system does not have a great ability to look forward, but rather in the rearview mirror. In my experience, governments and regulators solve the problems that cause a crisis, and often the solutions found carry the seeds of the next crisis.”          Larry Fink,  CEO of BlackRock, Interview with the French newspaper Le Monde, 19th September 2018   The […]