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The Banking Crisis: Causes, Consequences and Remedies. CEPS Policy Brief No. 178, November 2008

De Grauwe, Paul. (2008) The Banking Crisis: Causes, Consequences and Remedies. CEPS Policy Brief No. 178, November 2008. [Policy Paper]

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    Abstract

    Bubbles and crashes are an endemic feature of financial markets in capitalist countries. Thus, as a result of deregulation, the balance sheets of universal banks became fully exposed to these bubbles and crashes, undermining the stability of the banking system. The Basel approach to stabilise the banking system has as an implicit assumption that financial markets are efficient, allowing us to model the risks universal banks take and to compute the required capital ratios that will minimise this risk. I argue that this approach is unworkable because the risks that matter for universal banks are tail risks, associated with bubbles and crashes. These cannot be quantified. As a result, there is only one way out, and that is to return to narrow banking, a model that emerged after the previous large-scale banking crisis of the 1930s but that was discarded during the 1980s and 1990s under the influence of the efficient market paradigm.

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    Item Type: Policy Paper
    Subjects for non-EU documents: EU policies and themes > Policies & related activities > economic and financial affairs > Single Market > capital, goods, services, workers
    EU policies and themes > Policies & related activities > economic and financial affairs > financial crisis 2008-on and consequences/reforms
    Subjects for EU documents: UNSPECIFIED
    EU Series and Periodicals: UNSPECIFIED
    EU Annual Reports: UNSPECIFIED
    Series: Series > Centre for European Policy Studies (Brussels) > CEPS Policy Briefs
    Depositing User: Phil Wilkin
    Official EU Document: No
    Language: English
    Date Deposited: 03 Oct 2009
    Page Range: p. 12
    Last Modified: 15 Feb 2011 18:16
    URI: http://aei.pitt.edu/id/eprint/11706

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