The Eurozone is weak. This column presents an analysis of its two prime weaknesses – the lack of economic and fiscal policy discipline leading to the build-up of huge public and private debt levels and a loss of competitiveness, and the lack of credible mechanisms for crisis response that would reign in moral hazard problems and establish market discipline. Completing the currency union’s architecture and achieving credibility for its rules are key, given the heterogeneity and rigidity of its member countries' economies.
Lars P Feld, Christoph M Schmidt, Isabel Schnabel, Volker Wieland, Monday, September 7, 2015 - 00:00
Xavier Vives, Tuesday, March 17, 2015 - 00:00
Dirk Niepelt, Wednesday, January 21, 2015 - 00:00
Xavier Vives, Monday, December 22, 2014 - 00:00
Claudio Michelacci, Hernán Ruffo, Tuesday, November 18, 2014 - 00:00
Kuniyoshi Saito, Daisuke Tsuruta, Friday, November 14, 2014 - 00:00
Bruno Biais, Jean-Charles Rochet, Paul Woolley, Thursday, August 21, 2014 - 00:00
The Global Crisis has intensified debates over the merits of financial innovation and the optimal size of the financial sector. This column presents a model in which the growth of finance is driven by the development of a financial innovation. The model can help explain the securitised mortgage debacle that triggered the latest crisis, the tech bubble in the late 1990s, and junk bonds in the 1980s. A striking implication of the model is that regulation should be toughest when finance seems most robust and when innovations are waxing strongly.
Pierre-Cyrille Hautcoeur, Angelo Riva, Eugene N. White, Wednesday, July 2, 2014 - 00:00
The key challenge for lenders of last resort is to ameliorate financial crises without encouraging excessive risk-taking. This column discusses the lessons from the Banque de France’s successful handling of the crisis of 1889. Recognising its systemic importance, the Banque provided an emergency loan to the insolvent Comptoir d’Escompte. Banks that shared responsibility for the crisis were forced to guarantee the losses, which were ultimately recouped by large fines – notably on the Comptoir’s board of directors. This appears to have reduced moral hazard – there were no financial crises in France for 25 years.
Friðrik Már Baldursson, Richard Portes, Monday, January 6, 2014 - 00:00
In 2008, Icelandic banks were too big to fail and too big to save. The government’s rescue attempts had devastating systemic consequences in Iceland since – as it turned out – they were too big for the state to rescue. This column discusses research that shows how this was a classic case of banks gambling for resurrection.
Kaushik Basu, Joseph Stiglitz, Thursday, January 2, 2014 - 00:00
The Eurozone crisis exposed weaknesses in the Eurozone’s design. This column – by Nobelist Joe Stiglitz and World Bank Chief Economist Kaushik Basu – argues that the Eurozone’s financial architecture can be improved by amending the Treaty of Lisbon to permit appropriately structured cross-country liability for sovereign debt incurred by EZ members.
Thomas Huertas, María J Nieto, Thursday, September 19, 2013 - 00:00
To end moral hazard, investors, not taxpayers, should bear the loss associated with bank failures. Recently, the EU took a major step in this direction with the Banking Recovery and Resolution Directive. This column argues that this is a game changer. It assures through the introduction of the bail-in tool that investors, not taxpayers, will primarily bear the cost of bank failures, and it opens the door to resolving banks in a manner that will not significantly disrupt financial markets.
Eduardo Cavallo, Eduardo Fernandez-Arias, Wednesday, October 17, 2012 - 00:00
The Eurozone body politic seems to be slowly learning the lessons for crisis management. This column argues that Latin America’s decades of financial crisis can provide key insights for Europe.
Charles Wyplosz, Monday, September 26, 2011 - 00:00
Last weekend, Eurozone policymakers were shaken into admitting that something more needs to be done to save the Eurozone and avoid a major crisis that would reverberate around the world. This column proposes a three-step solution to finally end the crisis.
Hans Gersbach, Saturday, April 2, 2011 - 00:00
When banks failed, the government paid up. But the bankers responsible kept their bonuses from the years of excess. This column argues for “crisis contracts”. Such contracts require that, in the event of a crisis, bank managers forfeit a portion of their past earnings to rescue the banking system.
Russell Cooper, Hubert Kempf, Friday, February 18, 2011 - 00:00
Before the surprising 2007 collapse of Northern Rock, it was taken for granted that bank runs were things of the past. But their return and the modifications of deposit insurance schemes lead many to question the credibility of the government’s commitment. What makes a run on a bank? And when should the government intervene? This column provides some answers.
Federico Etro, Thursday, November 4, 2010 - 00:00
Looking at the contracts for large oil paintings in Italy (1550-1750), this column finds evidence of strong competition between painters. Contracts were structured to address moral hazard problems, and prices closely reflected demand and supply conditions in an integrated market.
John Van Reenen, Tuesday, May 4, 2010 - 00:00
How can financial regulation be fixed to avoid another global crisis? This column argues that the “heads, I win; tails, society loses” moral hazard in the financial sector has to stop. To do this, policymakers must make bankruptcy credible. If a company has too much debt and becomes insolvent, it should suspend payments and its shareholders and creditors should lose their money.
Brian Bell, John Van Reenen, Monday, May 3, 2010 - 00:00
The global crisis has sharpened the media spotlight and political debate on bankers’ bonuses. Focusing on evidence from the UK, this column argues that to avoid excessive risk-taking in the financial sector and exploitation of moral hazard, bankers’ bonuses should be based on risk-adjusted long-run performance or be subject to “clawback” if future performance declines.
Stefano Micossi, Tuesday, March 16, 2010 - 00:00
Policymakers and commentators have suggested that large banks should be broken up. This column argues that such an idea risks the very existence of a global financial system. It outlines an alternative framework in which deposit insurance should be covered by banks not taxpayers, banks should not be guaranteed a bailout, and regulators should be mandated to step in when the warning signs begin.
Ricardo Caballero, Tuesday, November 17, 2009 - 00:00
How should governments respond to sudden failure of the financial system? This column says that it is neither credible nor desirable to refuse to assist the private sector in financial crises. It makes the case for massive provision of credible public insurance and guarantees to financial transactions and balance sheets – a financial defibrillator to respond to sudden financial arrest.