A perspective on the symptoms and causes of the financial crisis

Ricardo Cabral

Journal of Banking & Finance, 2013, vol. 37, issue 1, 103-117

Abstract: Prior to the 2007–2008 financial crisis, banking sector profits were very high but the profitability of financial intermediation was poor. Using a novel model of banking, this article argues that the high profits were achieved through balance sheet expansion and growing default, liquidity, and term risk mismatches between assets and liabilities. As a result, large banks’ financial leverage rose as they became less liquid, setting the conditions for a systemic banking crisis. This article argues that the increase in financial leverage was possible due to misguided changes in the regulatory framework, specifically, the Basel I capital accord and reductions in reserve requirements. Finally, this article overviews and assesses the policy response in the aftermath of the crisis.

Keywords: Financial crisis; Financial intermediation; Basel accords; Reserve requirements; G20 Leaders’ Summits; Dodd-Frank Act (search for similar items in EconPapers)
JEL-codes: E51 G01 G21 G28 (search for similar items in EconPapers)
Date: 2013
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (11)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:37:y:2013:i:1:p:103-117

DOI: 10.1016/j.jbankfin.2012.08.005

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