Financial Globalization:
Opportunity and Crisis
Roberto Chang
Econ 436
Rutgers University
Reading
KOM, chapter 20
Agenda
1.
2.
3.
4.
5.
6.
The 2023 Banking Crisis: Some Lessons
Comparison with the 2007-9 Global Financial Crisis
Banks and Financial Fragility
Government Policy and the Liquidity vs Moral Hazard Dilemma
The International Capital Market
Regulating International Banking
The 2023 Bank Crisis: Notable
Aspects
Source: bankrate.com
Source: reddit.com/r/dataisbeautiful
Source: macrohive.com
Source: netinterest.co
Source: nytimes.com
Source: nytimes.com
Bailouts, Insurance, and Moral Hazard
Federal regulators on Sunday unveiled the most sweeping backstop for the
U.S. banking system since the 2008 crisis, to limit carnage from the collapse
of Silicon Valley Bank. The decision has shaken up global markets, with
investors selling bank stocks and betting that the Fed would hold off on
further interest rate rises.
Too Big to Fail is as alive as ever, but now no bank is too small to fail as well...
Banking is now officially a government-backed business, if it wasn’t
before. Let’s admit it: Once the government guarantees all deposits, the
“business” of banking isn’t much of a business — and maybe shouldn’t be.
This is likely to become the biggest debate of the coming weeks and months.
The New York Times, March 13 2023
Key Aspects of Government Intervention
1.
2.
3.
4.
5.
6.
Deposit Insurance
Reserve Requirements
Capital Requirements and Asset Restrictions
Bank Examination
Lender of Last Resort Facilities
Government-organized Restructuring and Bailouts
 See KOM, especially pp. 642-5 about challenges related to financial
globalization
Notable Aspects of This Episode
1.
2.
3.
4.
5.
6.
7.
8.
The fragility of banks and the onset of panics
The real costs of financial crises
Regulation, insurance, and moral hazard
The “too big to fail” problem (systemic crises)
International linkages and crisis contagion
Recent attempts at regulation: Basel I, II, and III, Dodd-Frank
Liquidity Facilities and the Fed as International Lender of Last Resort
Compare with 2007-9 Global Financial Crisis (pp. 645-8 of KOM)
The 2007-9 Global Financial Crisis
220
200
180
160
140
120
100
80
Ja
n-0
0
Ja
n-0
1
Ja
n-0
2
Ja
n-0
3
Ja
n-0
4
Ja
n-0
5
Ja
n-0
6
Ja
n-0
7
Ja
n-0
8
USA: Real Estate Price Index
(S&P/Case-Shiller 20 City Composite Index)
Source: MacroMarkets
Ja
n-0
9
Ja
n-1
0
Real Interest Rates, 1999-2006
5.00
4.50
4.00
3.50
3.00
2.50
2.00
1.50
1.00
0.50
Ja
n99
Ju
l-9
9
Ja
n00
Ju
l-0
0
Ja
n01
Ju
l-0
1
Ja
n02
Ju
l-0
2
Ja
n03
Ju
l-0
3
Ja
n04
Ju
l-0
4
Ja
n05
Ju
l-0
5
Ja
n06
Ju
l-0
6
0.00
10-Year 3-7/8% Treasury Inflation-Indexed Note. Source: FRED, Federal Reserve Bank of St. Louis
5
Lehman
4
3
Northern Rock
2
1
Bear Stearns
0
1/3
/
-1
9/
1/
9/
5/
9/
1/
5/
5/
9/
1/
5/
1/
5/
20 3/20 3/20 3/20 3/20 3/20 3/20 3/20 3/20 3/20 3/20 3/20 3/20 3/20
07
08
09
06
06
06
07
07
08
08
09
09
10
10
TED Spread (LIBOR Versus T-Bill, percentage points)
2500000
2000000
Total
1500000
Asset Backed
1000000
500000
Financial, Non Asset Backed
Non Financial, Non Asset Backed
20
04
20 0 1
04
20 0 6
04
20 1 1
05
20 0 4
05
20 0 9
06
20 0 2
06
20 0 7
06
20 1 2
07
20 0 5
07
20 1 0
08
20 0 3
08
20 0 8
09
20 0 1
09
20 0 6
09
20 1 1
10
-0
4
0
Commercial Paper Market
(Millions US$)
Ja
n0
Ap 5
r- 0
5
Ju
l-0
O 5
ct
-0
Ja 5
n0
Ap 6
r- 0
Ju 6
l-0
O 6
ct
-0
Ja 6
n0
Ap 7
r- 0
7
Ju
l-0
O 7
ct
-0
Ja 7
n0
Ap 8
r- 0
8
Ju
l-0
O 8
ct
-0
Ja 8
n0
Ap 9
r- 0
Ju 9
l-0
O 9
ct
-0
Ja 9
n10
8.0
6.0
4.0
2.0
0.0
-2.0
-4.0
US: GDP Growth (% last 12 months)
Source: FRED, St. Louis Fed
8.00
7.00
6.00
5.00
4.00
3.00
2.00
1.00
0.00
6/ 12 6/ 12 6/
1
6
1
6
1
6
1
6
1
6
1
6
1
6
1
28
/2 28
/2 28 2 /2 /28 2 /2 /28 2 /2 /28 2 /2 /28 2 /2 /28 2 /2 /28 2 /2 /28 2 /2
/2 8 /
/
/
/
/
/
/
/
/
/
8
8
8
8
8
8
8
8
8
0 0 2 0 20 0 /2 0 20 0 /2 0 20 0 /2 0 20 0 /2 0 20 0 /2 0 20 0 /2 0 20 0 /2 0 20 0 /2 0 20 0 /2 0
0
00 1
01 2
02 3
03 4
04 5
05 6
06 7
07 8
08 9
09
US: Federal Funds Rate (Percentage)
Source: FRED, St. Louis Fed
8.00
7.00
6.00
5.00
4.00
3.00
2.00
1.00
0.00
6/ 12 6/ 12 6/
1
6
1
6
1
6
1
6
1
6
1
6
1
6
1
28
/2 28
/2 28 2 /2 /28 2 /2 /28 2 /2 /28 2 /2 /28 2 /2 /28 2 /2 /28 2 /2 /28 2 /2
/2 8 /
/
/
/
/
/
/
/
/
/
8
8
8
8
8
8
8
8
8
0 0 2 0 20 0 /2 0 20 0 /2 0 20 0 /2 0 20 0 /2 0 20 0 /2 0 20 0 /2 0 20 0 /2 0 20 0 /2 0 20 0 /2 0
0
00 1
01 2
02 3
03 4
04 5
05 6
06 7
07 8
08 9
09
US: Federal Funds Rate
Source: FRED, St. Louis Fed
1600000
1400000
1200000
All Liquidity Facilities*
1000000
Term Auction Credit
Commercial Paper Funding Facility
800000
Central Bank Liquidity Swaps
600000
Term Asset-Backed Securities Loan
Facility
400000
200000
0
28-Apr07
14-Nov- 1-Jun-08 18-Dec- 6-Jul-09
07
08
22-Jan10
10-Aug10
26-Feb11
Emergency Liquidity Programs
(Billions of US$)
4500000
4000000
Total
3500000
3000000
2500000
Treasury Bills
2000000
1500000
1000000
500000
0
Federal Reserve: Securities Held
(Billions US$)
Source: Board of Governors, FRED
Mortgage Backed
3000
2500
Bank Reserves
2000
1500
Cash in Circulation
1000
500
0
Federal Reserve Liabilities
(Millions US$)
Unnumbered Figure 4.1 A broken transmission: the Fed’s extraordinary interventions did little to change private credit market interest rates in 2008–2009
Feenstra and Taylor: International Macroeconomics, Second Edition
Copyright © 2012 by Worth Publishers
Summary and Takeaways
Summary and Takeaways
• Banks and other financial institutions are socially beneficial (see
discussion in KOM)
• But they are also fragile
• Reason for insurance and regulation
• But: moral hazard, excessive risk taking, “too big to fail”
• Complications emerge from international financial integration
• Offshore banking, Eurodeposits, regulatory arbitrage: see KOM
For these and related
issues...
• Read KOM, chapter
20