us & eu linkages: how did they contribute to the crisis?
DESCRIPTION
A talk for the European Integration Summer School.TRANSCRIPT
The current banking crisis (EU and US linkages)Dr Stephen Kinsella, UL | stephenkinsella.netSummer School Lecture, August 19th, 2009
Today
3 Ideas.
History of regulation matters most in explaining crisis.
1/3
US/EU Linkages much stronger
than in previous crises, very bad
thing.
2/3
Implementation of regulation will not
be effective enough to
mitigate crisis of 2020’s.
3/3
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 regulation matters most in explaining crisis.
1/3
History
See ft.com, http://ec.europa.eu/index_en.htm for details
Current vs proposed regulatory changes
EU
Current vs proposed regulatory changes
EU
US
Current vs proposed regulatory changes
Current vs proposed regulatory changes
US
US/EU Linkages much stronger
than in previous crises, very bad
thing.
2/3
Chapter 2The Financial Services Industry Has Undergone Dramatic Changes
Page 45 GAO-05-61 Financial Regulation
Figure 2: International Debt Securities, 1987-2004
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 boundaries. U.S.-owned financial services firms have increased their international activities, and a significant number of foreign-owned financial services companies are operating within the United States. In banking, for example, Citibank has substantial and growing retail banking activities in Germany and ING Direct, a Dutch-owned company, has a large deposit base in the United States. In the securities sector, in 2003 U.S. investors held $2.5 trillion of foreign securities, and foreign holdings of U.S. securities other than U.S. Treasury securities rose to $3.4 trillion. In the insurance sector, a significant portion of U.S. insurers and the U.S. market are now foreign controlled. In 2001, 142 U.S. life insurers were foreign-owned, up from 69 in 1995. And, according to the International Insurance Institute, from 1991 to 1999, sales by foreign-owned property-casualty insurers doing business in the United States grew by 62.8 percent.
Deregulation and technological change have facilitated globalization. Barriers that once limited international financial transactions have been substantially reduced or removed, and greater computing power and better
0
2,000
4,000
6,000
8,000
10,000
12,000
14,000
200420032002200120001999199819971996199519941993199219911990198919881987
Dollars in billions
Source: Bank for International Settlements.
See http://www.ecb.int/stats/services/latest/html/index.en.html
Chapter 2The Financial Services Industry Has Undergone Dramatic Changes
Page 47 GAO-05-61 Financial Regulation
Figure 3: Share of Assets in Each Sector Controlled by 10 Largest Firms, 1996-2002
605550454035302520
65
105
15
0
Source: TowerGroup.
Property/casualty insurance
Life insurance
Commercial banks
Securities firms
Savings institutions
Percent
1996 1997 1998 1999 2000 2001 2002
Increased Market concentration by financial sector
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
Chapter 2The Financial Services Industry Has Undergone Dramatic Changes
Page 49 GAO-05-61 Financial Regulation
Figure 4: Merger Activity among Banking Organizations, January 1990-June 2004
1990-1995 1996 1997 1998 1999 2002 200420012000
CiticorpEuropean American BankUniversal Bank, N.A.
First Interstate BancorpWells Fargo & CompanyNorwest Holding Company
Wells Fargo & Company Wells Fargo& Company
Source: GAO.
J.P. MorganChase & Co.
American National
American National Bank and Trust Company of ChicagoBanc OneFirst CommerceFirst ChicagoNBD Bancorp
First Chicago NBDFirst Chicago NBD
Bank One
Bank One
Chase ManhattanJ.P. Morgan & Co.
Chemical BankingManufacturers Hanover
J.P. Morgan Chase & Co.
Chemical BankingChase Manhattan
United States National Bank of Oregon
Mercantile Bancorporation
First Bank SystemU.S. Bancorp
U.S. Bancorp
FirstarU.S. Bancorp
Firstar
CitigroupCitigroup
Maryland National Bank
BankAmerica
Boatmen's National Bank of St. Louis
Continental BankSecurity Pacific Bancorporation Northwest
C & S/Sovran
Barnett Banks
BankAmerica
NationsBankNationsBank
Bank ofAmerica
NatWest Bank National Association
BancBoston HoldingsBay Banks
Fleet Financial GroupBank of New EnglandShawmutSummit BancorpUJB Financial
BankBoston
FleetBoston Financial
FleetBoston FinancialFleet Financial Group
Fleet Financial Group
Summit
BankAmerica
NationsBank
NCNB National Bank of Florida
Philadelphia National Bank
Central Fidelity National Bank
First Fidelity
Signet
Wachovia
First UnionFirst Union
Wachovia
Wachovia
First Union
Meridian BankCorestates Financial Corestates Financial
Corestates Financial
[Linkages matter]
Implementation of regulation will not
be effective enough to
mitigate crisis of 2020’s.
3/3
[Minsky]
Minsky Moments
Idea: Credit markets will breed their own reversal
Minsky Moments1. 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.netSummer School Lecture, August 19th, 2009