A perspective on the symptoms and causes of the financial crisis

Cabral, Ricardo

http://hdl.handle.net/10400.3/4970

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Authors

Cabral, Ricardo

Abstract(s)

This article identifies two paradoxes prior to the onset of the financial crisis: banking profits were at historically high levels despite the impending crisis; and though profits were high the profitability of financial intermediation was poor. Using a novel model of banking, it argues that large banks attained high profits through balance sheet expansion and growing mismatches between assets and liabilities. As a result, large banks’ financial leverage rose while their liquidity structure worsened, setting the conditions for a systemic banking crisis. Finally, this article argues that this conduct and performance was only possible due to misguided changes to the regulatory framework, specifically the Basel I Capital Accord and reductions in reserve requirements.

Keywords

Banking Basel Capital Accords Financial Crisis Financial Intermediation Reserve Requirements

URI

http://hdl.handle.net/10400.3/4970

Citation

Cabral, Ricardo (2011). A perspective on the symptoms and causes of the financial crisis, “Working Paper Series” nº 9/11, 49 pp.. Ponta Delgada: Universidade dos Açores, CEEAplA-A.