Risk-Pricing and the Sub-Prime Crisis

Andrew Haldane

World Economics, 2008, vol. 9, issue 3, 31-46

Abstract: As the sub-prime crisis celebrates its first birthday, what lessons have been learnt? The crisis was rooted in a misperception problem among end-investors, facilitated by financial engineers selling “tail risk†products. Contrary to the precrisis rhetoric, this tail risk was often transferred to those least able to manage and price it. Once crisis struck, bank balance sheets needed to be repaired. The article argues that the authorities have a key coordinating role to play in ensuring individual bank balance sheet adjustments strengthen, rather than weaken, the financial system as a whole. A credit crunch-an uncoordinated credit contraction—is an example of what policy should be seeking to avoid. Finally, the article considers two medium-term prophylactic policy measures-countercyclical regulatory policy and central trading, clearing and settlement of systemically-important financial instruments. On both theoretical and practical grounds, there are good reasons for believing their time may have come.

Date: 2008
References: Add references at CitEc
Citations: View citations in EconPapers (2)

Downloads: (external link)
https://www.worldeconomics.com/Journal/Papers/Article.details?ID=341 (application/pdf)

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:wej:wldecn:341

Access Statistics for this article

More articles in World Economics from World Economics, 1 Ivory Square, Plantation Wharf, London, United Kingdom, SW11 3UE
Bibliographic data for series maintained by Ed Jones ().