Deleveraging, Traditional versus Capital Markets Banking and the Urgent Need to Separate and Recapitalise G-SIFI Banks

Adrian Blundell-Wignall and Paul Atkinson

OECD Journal: Financial Market Trends, 2012, vol. 2012, issue 1, 7-44

Abstract: Since the crisis, even with massive support from governments and central banks, widespread regulatory changes and promises from bank executives to improve the governance of risk, the world continues to see failures of Globally Systemically Important Financial Institutions (G-SIFIs, like Dexia), and huge losses (most recently from JP Morgan). Banks refuse to lend to each other, the central banks have become the interbank market and ‘bad deleveraging’ bears down on the economy forcing job losses in small- and medium-sized companies. ‘Good deleveraging’ occurs via building capital, and in this respect the US approach to dealing with the crisis provides something of a lesson that policy makers in Europe should take note of. With respect to regulations, the paper shows that capital and liquidity rules create a bias against lending to the enterprise sector (that drives jobs and economic growth). With respect to G-SIFIs, the paper shows how movements in their balance sheets are dominated by derivatives, the exposure to which varies with the cycle in risk. Netting of derivatives provides no protection against market risk, and the collateral and margin calls associated with these swings is both pro-cyclical and dangerous. The paper argues the OECD case that the best way to deal with all of these issues – both materially reducing the risk that arises from too-big-to fail while encouraging well-capitalised retail banks get on with the job of lending to create jobs – is to separate retail banking from securities business and ensure the former is (particularly in Europe) well capitalised. In this respect the paper argues that the non-operating holding company approach with ring-fenced subsidiaries (close to the Vickers proposal in the UK) is perhaps a better model than the US Volcker rule.

Date: 2012
References: Add references at CitEc
Citations: View citations in EconPapers (12)

Downloads: (external link)
https://doi.org/10.1787/fmt-2012-5k91hbvgfq20 (text/html)
Full text available to READ online. PDF download available to OECD iLibrary subscribers.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:oec:dafkad:5k91hbvgfq20

Access Statistics for this article

More articles in OECD Journal: Financial Market Trends from OECD Publishing Contact information at EDIRC.
Bibliographic data for series maintained by ().