EconPapers    
Economics at your fingertips  
 

An Asset-Based Framework of Credit Creation (applied to the Global Financial Crisis)

Susanne von der Becke () and Sornette Didier ()
Additional contact information
Sornette Didier: ETH Zurich, D-MTEC - Chair of Entrepreneurial Risks, Scheuchzerstrasse 7, 8092Zurich, Switzerland

Accounting, Economics, and Law: A Convivium, 2019, vol. 9, issue 2, 21

Abstract: We develop a conceptual asset-based framework of credit creation based on three leading variables: (i) the amount of assets acceptable as collateral, (ii) the level of leverage and (iii) the level of trust. As credit expands along these dimensions in a non-linear dynamic, the financial system becomes more liquid. At the same time, it becomes more prone to endogenous feedbacks and vulnerable to internally generated instabilities manifested as booms and busts. Applying this framework to the global financial crisis, we show that the subprime crisis was both a signature and only one possible trigger in an increasingly unstable financial system. Using historical data, we demonstrate a significant shift in the components of US bank balance sheets and a decoupling of bank assets from deposits since the mid-1980s, marking the rise of “securitized-fractional reserve banking”. The subsequent decades were a period of growing leverage, with debt-securities assuming money-like functions and serving as collateral for further credit creation. As trust began to recede, the high levels of leverage were no more viable, precipitating a reduction of the amount of assets acceptable as collateral, and leading to a contraction in credit and to liquidity spirals. We discuss the potential general applicability of this framework of credit creation and define extensions in future research.

Keywords: credit creation; financial crises; leverage; liquidity; confidence (search for similar items in EconPapers)
JEL-codes: B53 E12 E13 E51 G01 (search for similar items in EconPapers)
Date: 2019
References: View references in EconPapers View complete reference list from CitEc
Citations: Track citations by RSS feed

Downloads: (external link)
https://www.degruyter.com/view/j/ael.2019.9.issue- ... -0002.xml?format=INT (text/html)
Download restriction for institutions: For access to full text, subscription to the journal is required. Individual readers who register with De Gruyter Online get free access.

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:bpj:aelcon:v:9:y:2019:i:2:p:21:n:1

Ordering information: This journal article can be ordered from
https://www.degruyter.com/view/j/ael

Access Statistics for this article

Accounting, Economics, and Law: A Convivium is currently edited by Reuven S. Avi-Yonah, Yuri Biondi and Shyam Sunder

More articles in Accounting, Economics, and Law: A Convivium from De Gruyter
Bibliographic data for series maintained by Peter Golla ().

 
Page updated 2019-09-21
Handle: RePEc:bpj:aelcon:v:9:y:2019:i:2:p:21:n:1