Unfinished business: The unexplored causes of the financial crisis and the lessons yet to be learned
At this event Tamim Bayoumi will present his upcoming book on the financial crisis, showing how the Euro crisis and U.S. housing crash were, in fact, parasitically intertwined.
video & audio recording
The discussion went around the recent book, called “Unfinished Business”. Nine years ago a financial giant – Lehman Brothers filed for bankruptcy and it was followed by the loss of belief in the banking system. However, as it was underlined in the discussion, it was not only policymakers, who at that time did not expect a crisis, but academics and financial experts as well who underestimated the existing risks.
The main motivation for the book was a frustration of the author about what has been written on the financial crisis of 2008 before. It was biased either towards the North Atlantic economy discussion or Europe’s reaction to the financial crisis. Contrary, the author’s approach is instead to study the origins to understand the story behind and underlying forces to finish an unfinished business. The book’s focuses on the financial regulation aspects.
The central question of the discussion was how the collapse of one bank led to the collapse of the financial system worldwide and a short answer is that a whole series of regulatory missteps took place. The story goes back to 1980s. The European banks in mid 80s made a transition from lightly capitalized universal banks to better capitalized commercial periphery banks and later in 1992 the decision to have banking regulation at national level was made. This provoked two tendencies, which are a focus of regulators on national level and the fast expansion of banks. In the US, in comparison to the EU, there were highly separated either commercial or investment banks. In 2002 the structure of the US banking system changed from the strongly capitalized commercial banks to lightly capitalized US investment banks, which led to the transfer of mortgage from commercial to investment banks. By 2002 securitization was the most popular option, banks sold most mortgages to markets and after 2003 private mortgage securities surged. European banks had about 50 % of GDP in the North Atlantic banks mainly because that’s where investment banking was taking place in 2007. We allowed banking system to expand by creating demand through creating loans. Looking back, from the recent research it seems that bank oriented financial systems are more vulnerable compared to market oriented and this primarily explains why the US performed relatively better during the financial crisis.
The title “Unfinished business” speaks for itself, but it seems important to mention that there is a lot of finished business too with the progress reached in the European banking system. We have improvements in terms of the increased quality and quantity of capital, banking models used and the requirement to have financial stability authorities to mention a few. We are moving forward.
Event Notes by Yana Myachenkova
Check-in and lunch
Tamim Bayoumi, Deputy director, strategy, policy, and review department, IMF
Aerdt Houben, Director Financial Markets, De Nederlandse Bank and professor, University of Amsterdam
Deputy director, strategy, policy, and review department, IMF
Deputy Director, Bruegel
Director Financial Markets, De Nederlandse Bank and professor, University of Amsterdam
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