Essays On Banking Crisis

To some extent the bank failures and crisis of 2007-8 have been foreseen from academic work published prior to 2003


1 Introduction of financial crisis in 2007-8

The financial crisis which started in August 2007 is recognized the largest turmoil since 1929-33[1].According to the Federal Deposit Insurance Corporation, since the beginning of the credit crunch, there are three banks failed in 2007[2], in total of twenty-five banks in the US have closed their doors and have been taken over by FDIC In 2008[3]. But since this year along, the number of the failed banks has been up to106 which is almost four times of the total number of bank failures in 2008[4].

However, people didn't notice the fragility of the US economy when the US is in an economic bust .Why? Rogoff (formerly general economist at the International Monetary Fund (IMF)) stated that because when we are in a circumstance with a vast flow of money into our country, quantities of markets have been come out accordingly, which gives a trick that make people lose their perspective on estimating of what is really going on with the depressed interest rate[5].

Some of the most regarded economists[6] in USA cautioned that if the banking system is not quickly fixed the economic crisis will run deep[7]. Despite the injection of 790 dollars have been poured into the financial system for baking up by the central banks, it just showed a negligible role on it:

Rogoff, described the current recession as "a once in a 50-year event." He argued that the $790 billion stimulus bill is only part of the answer. "It's like giving a blood transfusion while the patient is still bleeding," he said. "If we're not going to fix the banking system at the same time, then it's just a temporary boost in the economy. We have simply not taken the proper decisive action with the banks."[8]

As is displayed in figure 1, the bar chart gives us the comparison of the number of annual bank failures between the S&L crisis when almost 3,000 banks failed in total and this year when 106 bank failures. Undoubtedlywe can anticipate that there will be more bank failures in the following year, considering that there were still 416 banks at an extremely high risk of failure, figured out by FDIC[9].


2 The prediction of bank failure in the academic works published prior to 2003

The financial crisis of 2007-2009 has been widely recognized the worst financial crisis since the Great Depression, which was an unpredictable shock to most financial market participators but not to the policy community to some extent[10]. Since central banks and international institutions like the International Monetary Fund have been progressing research in the predictors of financial crisis and publishing their findings which place emphasis on the financial stability since the Asian crisis of 1997[11].

As early as 1998, Gerard Caprio Jr. and Daniela Klingebiel's academic working paper"Bank Insolvency: Bad Luck, Bad Policy or bad banking?" have analyzed the elements that have contributed to the crises based on a first-ever compilation of data on insolvencies around the world since the late 1970s, they found that not only the macroeconomic indicators but also the microeconomic factors have conduced to bank crises[12]

Extending the line of research started by Estrella A Park S, and Peristiani S, in their working paper"Capital ratios as predictors of bank failure" in 2000, they assessed the efficacy of three types of capital ratios: "risk weighted ratio, leverage ratio, and gross revenue ratio" in predicting bank failures based on the empirical evidence of U.S. bank failures. Dedicating tothese ratios, finally they concluded that all three ratios informed the failures to a great extent. The most sophisticated ratio called risk-weighted ratio is the most effective predictor of failure over long time. However, over the shorter time horizons, the leverage ratio and gross revenue ratio can play a crucial role[13].

In fact, those indicators of bank failures mentioned in these working papers above can be detected and proved that it is in line with the feature of the leading factors of crisis in the economical background of 2007-08.


3 the leading indicators of bank failure

In effect, it is completely credible that there are not only one but various sorts of causations of bank failures in all economies. For example, the bad management (poor credit assessment, poor monitoring, risk concentration, connected lending, poor risk management, technical mismanagement, asset-liability mismatches and principal/agency problem), bank run, inadequate preparation for financial liberalization, market risk (exchange rate volatility), bank systematic risk, currency crises and so on.

In this section I just attempt to uncover some primary causes of banking crises in this financial crisis which are related to the working paper as I mentioned above. And I will also compare the indicators predicted priors to 2003 with the situation of crisis in 2007-8 to see if they correspond with each other

3.1 Macroeconomic Explanations

One study of crises in Latin America has laid stress on the macroeconomic elements[14], but macroeconomic stress is not the unique cause of bank crises[15].

Take Canada and the United States as an example, both of them stood the severe shocks of the Great Depression, what interesting is that the US failed 15,000 banks in the period 1920s-1930s, while Canada just experienced one bank fail during the same period. This case implies that

Bank failures and the state of the national economy are intertwined[16].

However, forces in addition to macroeconomic factors are worth analyzing in predicting[17].

3.1.1 Low real interest rate (rapid credit expansion)

Excess pleasant economic growth would lead to loose credit decisions and very high debt-equity ratio, resulting high leveraged risk. With such high ratio, banks are vulnerable to the slightest downturn in earnings, since most earnings are committed to paying interest[18]

Gavin and Hausmann discuss that the main factor behind the banking crisis is excessive credit growth[19]. A quick credit growth often results in a dump of the credit standards in banks, and leads it hard to appraise the value of time which needed to endure before apparently being indicative of an issue, since their information usually arrives late. They chose the credit growth rate of OECD countries between 1960 and 1969 as observables, which came to the conclusion that:

Officials should pay closer attention to credit growth and sound macroeconomic policy, though it is notable that what appeared to be excessive credit growth in Indonesia (and Japan) occurred at a time of single-digit inflation. It may well be that the monetary authorities should look at broader indicators of asset prices (which have little if any weight in consumer and producer prices) as well as at credit developments. But as the figure suggests, other factors also play a role in banking problems[20].

Accordingly, the context of economic environment over the span 0f 2000 to 2007 was one of the low interest rate. The high level of global liquidity results in the fall of interest rate and keeps the long term real interest rate underneath their previous decade by nearly 100 percent, which in sequence work on the accelerating of the credit expansion and asset prices raising[21].And the raise in real interest rates may stand for the ending of this process and the beginning of the torment for mortgagors[22]

3.1.2 Asset price bubble

The low real interest rate is also a leading factor of the asset bubbles[23]. And it is of significance to know that the crucial portion of the economy's total income and wealth are consist of dwelling house and housing estate, which are more vital than net financial assets in many countries[24]. The portion of sub-prime mortgages to other risky assets arose from around 9 % of in 2000 to over 40 % in 2006.[25]

As early as 1998,Caprio G and Klingbiel have figured out that asset price bubble is one of the primary causes of bank insolvency, see the chart attached[26].


In 2007, the explode of the real estate price and shortage of the initial payments lead to a lack of refinancing funds for institutions to pay their debt, which in turn force those institutions to have a fire sale on their funded property. Accordingly this sale should decrease their equity price on the market, which made a domino effect on those institutions that hold such assets. The bad news about one institution can cause investors' panic if they doubt there would be a domino effect and prompt them to withdraw money from banks and other connected banks.

Figure 5 depicts the real estate prices increased much faster than their long-term trend either in the UK or the US, which indicates that house prices are over estimated in Spain, France and US. In all these countries credit growth expanded rapidly[27]

3.2 Heavily concentrated loan portfolio

When a bank lend a big proportion of the loan to a single borrower or to a particular sector and invest a big proportion in high risk socks or bonds, which is lack of diversification and always risk to fail. Caprio and Klingbiel have attributed bank insolvency to not only one but a variety of causes, such as macroeconomic shock and large focused loan portfolio, which can lead banks to a low net worth[28].

However, the context of economy in 2007-08 is that the loan of residential mortgages made up the largest proportion of the whole loan portfolio, which is in line with the prior scholars' conclusion.

3.3 high leverage ratio

Banks are regarded as fragile and susceptible institutions, because they have:

1) low capital-to-assets ratios (high leverage), which provides little room for losses; (2) low cash-to-assets ratios (fractional reserve banking), which may require the sale of earning assets to meet deposit obligations;(3) high demand debt and short-term debt-to-total debt (deposits) ratios (high potential for a run), which may require hurried asset sales of opaque and non-liquid earning assets with potentially large fire-sale losses to pay off running depositors[29].

In the article "Capital ratios as predictors of bank failure", the writer tested the efficiency of three types of capital ratios which include the leverage ratio in predicting bank failure by statistical method. They found that the leverage ratio is statistically significant in predicting bank failure at the 1 percent level[30].

According to the statistical datum, the leverage ratio of the four major investment bank in U.S.--Goldman Sachs, Morgan Stanley, Merrill Lynch, Lehman Brothers--surged from 19 times on average in 2003 to about 28 times in 2007, especially the ration of Lehman Brothers have soared over 30 time. Instead of absorbing public deposit, these investment banks can just rely on financial market financing, including loans, issuing shares and bonds. The heavy reliance on market financing with such a high co-existence of financial leverage is really at odds. However, it is this pattern which is seemingly uncoordinated does exist in 5 years, until they collapse in crisis.

3.4 contagions

As Caprio and Klingbiel mentioned: "contagion can occur when creditors believe that there is a problem. This possibility of contagion suggests that a problem can have systemic implications even if only a small portion of banking system assets is impaired"[31].

An typical example of contagion should be the financial disturbance that struck several countries in East Asian in 1997.This turmoil spread to other countries in the world, disturbing the capital markets and changing the relative price of many financial derivatives, which nearly made Long-Term Capital Management go bankrupt viaoverspreading the crisis tothe speculative hedge-fund bets. Consequently, the disaster attacked Brazil's public debt and other countries in emerging economy in Latin America[32]

If a bank fails, an important concern is whether the financial system is resilient to the shock. As banks are closely intertwined financially with each other through landing to and borrowing from each other, holding deposit balance with each other, a failure of any bank is believed to be more likely to spill over to other banks

3.5 Volatility

Volatility is another factor contributes to the crisis. Because of the great variations in yield and prices, it is much hard to distinguish good borrowers. There experienced a much more volatility in output, inflation, and terms of trade in crisis countries from1980[33].

In Caprio and Klingebiel's investigation, the "Crisis countries" showed significantly greater volatility in terms of trade than that of the "Borderline crisis countries" and "non-crisis countries". The terms of trade in the "crisis countries" fell by over 10 percent in the years previous the affair. "Borderline crisis countries" drop down by 4%, nevertheless the "non crisis countries" got a 4% raise.

The volatility spillover index implies the extent of investor's panic response to the shock when they got the bad information about the status of the money markets. It mirrors the influence of the problems in financial markets indeed. Besides, the volatility spillover index not only can show the accumulation of tensions in the financial crisis but also catch the speed of the tensions spread according the markets during crises time[34].

Yilmaz has used the volatility spillover index since March 2007 to trace the influence of crisis shock, from which I can conclude the table underneath.

Date

Event

Volatility spillover index

late February

first signs of subprime worries -25 finance companies that used to provide subprime

mortgage loans declared bankruptcy

jumped from 45 to 55

July 25 to August 21

the turmoil spreading to all segments of financial markets and around the globe,

climed from 53 to 65

between January 18 and 31

news about the difficulties faced by MBIA and Ambac

67 to 73.8

March 16th

March 18

The fire-sale purchase of Bear Stearns by JP Morgan Chase then

FED cut its policy rate

declined to 71.9


4 conclusion

But a poor (or wildly expansionary) macroeconomic climate need not be fatal to banks. The regulatory framework�which, along with a variety of institutional variables, plays a crucial role in defining the incentive system in banks and the environment in which they function determines how resilient a banking system is in the face of shocks


Reference

1. Barrell, R; Davis, E. P. "The evolution of the financial crisis of 2007-8." National Institute Economic Review. October 01, 2008< Available from: http://www.brunel.ac.uk/9379/efwps/davisbarrellevolutionpaper.doc>[ Assessed on 25th Oct.2009]

2. "Bank Failures in 2008" Consumer News and Business Channel http://www.cnbc.com/id/26673834?slide=1

3. "Wikipedia, the free encyclopedia" 14 November 2009 < Available from:http://en.wikipedia.org/wiki/2008-2009_bank_failures_in_the_United_States>[ Assessed on 18th Oct.2009]

4. Bo Y. "one more bank failures in California and the number of failed bank will break out of one hundred" China security news October 19,2009 .http://news.xinhuanet.com/fortune/2009-10/19/content_12266927.htm

5. David Pendery "Three top economists agree 2009 worst financial crisis since great depression; risks increase if right steps are not taken." Reuters.from Business Wire News database. Fri Feb 27, 2009 10:22am EST Available from:< http://www.reuters.com/article/pressRelease/idUS193520+27-Feb-2009+BW20090227>[accessed on 28th October,2009]

6. David Pendery "Three top economists agree 2009 worst financial crisis since great depression; risks increase if right steps are not taken." Reuters.from Business Wire News database. Fri Feb 27, 2009 10:22am EST Available from:< http://www.reuters.com/article/pressRelease/idUS193520+27-Feb-2009+BW20090227>[accessed on 28th October,2009]

7. David Pendery "Three top economists agree 2009 worst financial crisis since great depression; risks increase if right steps are not taken." Reuters.from Business Wire News database. Fri Feb 27, 2009 10:22am EST Available from:< http://www.reuters.com/article/pressRelease/idUS193520+27-Feb-2009+BW20090227>[accessed on 28th October,2009]

8. Perry M. "106 Bank Failures In Perspective" Daily Markets, October 29, 2009<http://www.dailymarkets.com/stocks/2009/10/28/106-bank-failures-in-perspective/>[ Assessed on 1st Nov.2009]

9. Davis E.P. Karim D.(2008) "could early warning systems have helped to predict the sub-prime crisis?" Journal of Economic Literature (JEL) Review no 206(October)pp35-46

10. Barrell, R; Davis, E. P." The evolution of the financial crisis of 2007-8." National Institute Economic Review. October 01, 2008< Available from:http://www.brunel.ac.uk/9379/efwps/davisbarrellevolutionpaper.doc>[ Assessed on 25th Oct.2009]

11. Caprio G and Klingebiel D(1998)"Bank Insolvency: Bad Luck, Bad Policy or bad banking?" World bank web sit <Available from: http://go.worldbank.org/LZO8VXJOT0>[ Assessed on 5th Nov.2009]

Estrella A Park S, and Peristiani S (2000)"Capital ratios as predictors of bank failure" FEDERAL RESERVE BANK OF NEW YORK. Economic Policy Review.v.6 no.2.Jul,pp.33-52[ Assessed on 5th Nov.2009]

Gavin, Michael, Hausmann R. 1996. "The Roots of Banking Crises: The Macroeconomic Context." Hausmann R. , Rojas-Su�rez L. eds., Banking Crises in Latin America. Baltimore,Md. Hopkins J. Press.

Caprio G and Klingbiel D (1998 ) " Bank Insolvency : Bad Luck , Bad Policy or bad banking ?" World Bank web site < Available from: http://go.worldbank.org/LZO8VXJOT0>[ Assessed on 15th Oct.2009]

Caprio G and Klingbiel D (1998 ) " Bank Insolvency : Bad Luck , Bad Policy or bad banking ?" World Bank web site < Available from: http://go.worldbank.org/LZO8VXJOT0>[ Assessed on 15th Oct.2009]

Benston, George J., Robert A. Eisenbeis, Paul M. Horvitz, Edward J. Kane, George G.

Kaufman. 1986. "Safe and Sound Banking: Past, Present, and Future". Cambridge, Mass.:

MIT Press for the American Bankers Association.

Caprio G and Klingbiel D (1998 ) " Bank Insolvency : Bad Luck , Bad Policy or bad banking ?" World Bank web site < Available from: http://go.worldbank.org/LZO8VXJOT0>[ Assessed on 15th Oct.2009]

Gavin, Michael, and Ricardo Hausmann. 1996. "The Roots of Banking Crises: The

Macroeconomic Context." In Ricardo Hausmann and Liliana Rojas-Su�rez, eds., Banking

Crises in Latin America. Baltimore, Md.: Johns Hopkins Press

Caprio G and Klingbiel D (1998 ) " Bank Insolvency : Bad Luck , Bad Policy or bad banking ?" World Bank web site < Available from: http://go.worldbank.org/LZO8VXJOT0>[ Assessed on 15th Oct.2009]

Barrell R. Davis E. P. "The evolution of the financial crisis of 2007-8." National Institute Economic Review. October 01, 2008< Available from: http://www.brunel.ac.uk/9379/efwps/davisbarrellevolutionpaper.doc>[ Assessed on 25th Oct.2009]

Bell J., "Leading indicator models of banking crises -a critical review" Structural Economic Analysis Division and Darren Pain, Financial Industry and Regulation Division, Bank of England December ,2000<Available from: http://www.bankofengland.co.uk/publications/fsr/2000/fsr09art3.pdf >[ Assessed on 11th Nov.2009]


[1] Barrell, R; Davis, E. P. "The evolution of the financial crisis of 2007-8." National Institute Economic Review. October 01, 2008< Available from: http://www.brunel.ac.uk/9379/efwps/davisbarrellevolutionpaper.doc>[ Assessed on 25th Oct.2009]

[2] "Bank Failures in 2008" Consumer News and Business Channel http://www.cnbc.com/id/26673834?slide=1

[3] "Wikipedia, the free encyclopedia" 14 November 2009 < Available from:http://en.wikipedia.org/wiki/2008-2009_bank_failures_in_the_United_States>[ Assessed on 18th Oct.2009]

[4] Bo Y. "one more bank failures in California and the number of failed bank will break out of one hundred" China security news October 19,2009 .http://news.xinhuanet.com/fortune/2009-10/19/content_12266927.htm

[5] David Pendery "Three top economists agree 2009 worst financial crisis since great depression; risks increase if right steps are not taken." Reuters.from Business Wire News database. Fri Feb 27, 2009 10:22am EST Available from:< http://www.reuters.com/article/pressRelease/idUS193520+27-Feb-2009+BW20090227>[accessed on 28th October,2009]

[6] Nouriel Roubini, professor of economics and international business at New York University, Kenneth Rogoff, professor of economics and public policy at Harvard University, and Nariman Behravesh, chief economist and executive vice president for IHS Global Insight

[7] David Pendery "Three top economists agree 2009 worst financial crisis since great depression; risks increase if right steps are not taken." Reuters.from Business Wire News database. Fri Feb 27, 2009 10:22am EST Available from:< http://www.reuters.com/article/pressRelease/idUS193520+27-Feb-2009+BW20090227>[accessed on 28th October,2009]

[8] David Pendery "Three top economists agree 2009 worst financial crisis since great depression; risks increase if right steps are not taken." Reuters.from Business Wire News database. Fri Feb 27, 2009 10:22am EST Available from:< http://www.reuters.com/article/pressRelease/idUS193520+27-Feb-2009+BW20090227>[accessed on 28th October,2009]

[9] Perry M. "106 Bank Failures In Perspective" Daily Markets, October 29, 2009[ Assessed on 1st Nov.2009]

[10] Davis E.P. Karim D.(2008) "could early warning systems have helped to predict the sub-prime crisis?" Journal of Economic Literature (JEL) Review no 206(October)pp35-46

[11] Barrell, R; Davis, E. P." The evolution of the financial crisis of 2007-8." National Institute Economic Review. October 01, 2008< Available from:http://www.brunel.ac.uk/9379/efwps/davisbarrellevolutionpaper.doc>[ Assessed on 25th Oct.2009]

[12] Caprio G and Klingebiel D(1998)"Bank Insolvency: Bad Luck, Bad Policy or bad banking?" World bank web sit

Source: Essay UK - http://www.essay.uk.com/free-essays/economics/bank-failures-and-crisis.php


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Until the eve of the 1929 slump—the worst America has ever faced—things were rosy. Cars and construction thrived in the roaring 1920s, and solid jobs in both industries helped lift wages and consumption. Ford was making 9,000 of its Model T cars a day, and spending on new-build homes hit $5 billion in 1925. There were bumps along the way (1923 and 1926 saw slowdowns) but momentum was strong.

Banks looked good, too. By 1929 the combined balance-sheets of America’s 25,000 lenders stood at $60 billion. The assets they held seemed prudent: just 60% were loans, with 15% held as cash. Even the 20% made up by investment securities seemed sensible: the lion’s share of holdings were bonds, with ultra-safe government bonds making up more than half. With assets of such high quality the banks allowed the capital buffers that protected them from losses to dwindle.

But as the 1920s wore on the young Federal Reserve faced a conundrum: share prices and prices in the shops started to move in opposite directions. Markets were booming, with the shares of firms exploiting new technologies—radios, aluminium and aeroplanes—particularly popular. But few of these new outfits had any record of dividend payments, and investors piled into their shares in the hope that they would continue to increase in value. At the same time established businesses were looking weaker as consumer prices fell. For a time the puzzle—whether to raise rates to slow markets, or cut them to help the economy—paralysed the Fed. In the end the market-watchers won and the central bank raised rates in 1928.

It was a catastrophic error. The increase, from 3.5% to 5%, was too small to blunt the market rally: share prices soared until September 1929, with the Dow Jones index hitting a high of 381. But it hurt America’s flagging industries. By late summer industrial production was falling at an annualised rate of 45%. Adding to the domestic woes came bad news from abroad. In September the London Stock Exchange crashed when Clarence Hatry, a fraudulent financier, was arrested. A sell-off was coming. It was huge: over just two days, October 28th and 29th, the Dow lost close to 25%. By November 13th it was at 198, down 45% in two months.

Worse was to come. Bank failures came in waves. The first, in 1930, began with bank runs in agricultural states such as Arkansas, Illinois and Missouri. A total of 1,350 banks failed that year. Then a second wave hit Chicago, Cleveland and Philadelphia in April 1931. External pressure worsened the domestic worries. As Britain dumped the Gold Standard its exchange rate dropped, putting pressure on American exporters. There were banking panics in Austria and Germany. As public confidence evaporated, Americans again began to hoard currency. A bond-buying campaign by the Federal Reserve brought only temporary respite, because the surviving banks were in such bad shape.

This became clear in February 1933. A final panic, this time national, began to force more emergency bank holidays, with lenders in Nevada, Iowa, Louisiana and Michigan the first to shut their doors. The inland banks called in inter-bank deposits placed with New York lenders, stripping them of $760m in February 1933 alone. Naturally the city bankers turned to their new backstop, the Federal Reserve. But the unthinkable happened. On March 4th the central bank did exactly what it had been set up to prevent. It refused to lend and shut its doors. In its mission to act as a source of funds in all emergencies, the Federal Reserve had failed. A week-long bank holiday was called across the nation.

It was the blackest week in the darkest period of American finance. Regulators examined banks’ books, and more than 2,000 banks that closed that week never opened again. After this low, things started to improve. Nearly 11,000 banks had failed between 1929 and 1933, and the money supply dropped by over 30%. Unemployment, just 3.2% on the eve of the crisis, rose to more than 25%; it would not return to its previous lows until the early 1940s. It took more than 25 years for the Dow to reclaim its peak in 1929.

Reform was clearly needed. The first step was to de-risk the system. In the short term this was done through a massive injection of publicly supplied capital. The $1 billion boost—a third of the system’s existing equity—went to more than 6,000 of the remaining 14,000 banks. Future risks were to be neutralised by new legislation, the Glass-Steagall rules that separated stockmarket operations from more mundane lending and gave the Fed new powers to regulate banks whose customers used credit for investment.

A new government body was set up to deal with bank runs once and for all: the Federal Deposit Insurance Commission (FDIC), established on January 1st 1934. By protecting $2,500 of deposits per customer it aimed to reduce the costs of bank failure. Limiting depositor losses would protect income, the money supply and buying power. And because depositors could trust the FDIC, they would not queue up at banks at the slightest financial wobble.

In a way, it worked brilliantly. Banks quickly started advertising the fact that they were FDIC insured, and customers came to see deposits as risk-free. For 70 years, bank runs became a thing of the past. Banks were able to reduce costly liquidity and equity buffers, which fell year on year. An inefficient system of self-insurance fell away, replaced by low-cost risk-sharing, with central banks and deposit insurance as the backstop.

Yet this was not at all what Hamilton had hoped for. He wanted a financial system that made government more stable, and banks and markets that supported public debt to allow infrastructure and military spending at low rates of interest. By 1934 the opposite system had been created: it was now the state’s job to ensure that the financial system was stable, rather than vice versa. By loading risk onto the taxpayer, the evolution of finance had created a distorting subsidy at the heart of capitalism.

The recent fate of the largest banks in America and Britain shows the true cost of these subsidies. In 2008 Citigroup and RBS Group were enormous, with combined assets of nearly $6 trillion, greater than the combined GDP of the world’s 150 smallest countries. Their capital buffers were tiny. When they ran out of capital, the bail-out ran to over $100 billion. The overall cost of the banking crisis is even greater—in the form of slower growth, higher debt and poorer employment prospects that may last decades in some countries.

But the bail-outs were not a mistake: letting banks of this size fail would have been even more costly. The problem is not what the state does, but that its hand is forced. Knowing that governments must bail out banks means parts of finance have become a one-way bet. Banks’ debt is a prime example. The IMF recently estimated that the world’s largest banks benefited from implicit government subsidies worth a total of $630 billion in the year 2011-12. This makes debt cheap, and promotes leverage. In America, meanwhile, there are proposals for the government to act as a backstop for the mortgage market, covering 90% of losses in a crisis. Again, this pins risk on the public purse. It is the same old pattern.

To solve this problem means putting risk back into the private sector. That will require tough choices. Removing the subsidies banks enjoy will make their debt more expensive, meaning equity holders will lose out on dividends and the cost of credit could rise. Cutting excessive deposit insurance means credulous investors who put their nest-eggs into dodgy banks could see big losses.

As regulators implement a new round of reforms in the wake of the latest crisis, they have an opportunity to reverse the trend towards ever-greater entrenchment of the state’s role in finance. But weaning the industry off government support will not be easy. As the stories of these crises show, hundreds of years of financial history have been pushing in the other direction.

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