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Causes of the financial crisis: Risk misperception, policy mistakes, and banks' bounded rationality

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  • Rötheli, Tobias F.
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    Abstract

    This article describes important determinants of the current financial crisis. In particular, the text focuses on the bounded rationality of banks which contributes to the credit cycle. The credit cycle is the mechanism that links the present financial crisis with earlier crisis. Shortcomings on the side of monetary policy, rating agencies, and bank regulation are also discussed. We propose measures to strengthen the stabilizing effect of market forces, banks' risk management, as well as possible changes to regulation and monetary policy.

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    Bibliographic Info

    Article provided by Elsevier in its journal Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics).

    Volume (Year): 39 (2010)
    Issue (Month): 2 (April)
    Pages: 119-126

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    Handle: RePEc:eee:soceco:v:39:y:2010:i:2:p:119-126

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    Web page: http://www.elsevier.com/locate/inca/620175

    Related research

    Keywords: Financial crisis Bounded rationality;

    References

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    1. Goodhart, C., 2008. "Liquidity risk management," Financial Stability Review, Banque de France, issue 11, pages 39-44, February.
    2. repec:fip:fedgsq:y:2008:x:76 is not listed on IDEAS
    3. Joseph P. Hughes & William W. Lang & Loretta J. Mester & Choon-Geol Moon & Michael S. Pagano, 2002. "Do Bankers Sacrifice Value to Build Empires? Managerial Incentives, Industry Consolidation and Financial Performance," Center for Financial Institutions Working Papers 02-18, Wharton School Center for Financial Institutions, University of Pennsylvania.
    4. Zingales Luigi, 2008. "Plan B," The Economists' Voice, De Gruyter, vol. 5(6), pages 1-5, October.
    5. Adrian, T. & Shin, H S., 2009. "The shadow banking system: implications for fi nancial regulation," Financial Stability Review, Banque de France, issue 13, pages 1-10, September.
    6. Jose A. Lopez, 2008. "What is liquidity risk?," FRBSF Economic Letter, Federal Reserve Bank of San Francisco, issue oct24.
    7. De Long, J. Bradford & Shleifer, Andrei & Summers, Lawrence H. & Waldmann, Robert J., 1990. "Noise Trader Risk in Financial Markets," Scholarly Articles 3725552, Harvard University Department of Economics.
    8. Rotheli, Tobias F., 2001. "Competition, herd behavior, and credit cycles: evidence from major Swiss Banks," Journal of Economics and Business, Elsevier, vol. 53(6), pages 585-592.
    9. Rajan, Raghuram G, 1994. "Why Bank Credit Policies Fluctuate: A Theory and Some Evidence," The Quarterly Journal of Economics, MIT Press, vol. 109(2), pages 399-441, May.
    10. Ben S. Bernanke, 2008. "Risk management in financial institutions," Proceedings 1070, Federal Reserve Bank of Chicago.
    11. Karl E. Case & Robert J. Shiller, 2003. "Is There a Bubble in the Housing Market?," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 34(2), pages 299-362.
    12. Thomas M. Humphrey, 1989. "Lender of last resort: the concept in history," Economic Review, Federal Reserve Bank of Richmond, issue Mar, pages 8-16.
    13. Buiter, Willem H, 2007. "Lessons from the 2007 Financial Crisis," CEPR Discussion Papers 6596, C.E.P.R. Discussion Papers.
    14. Gabriel Jiménez & Jesús Saurina, 2006. "Credit Cycles, Credit Risk, and Prudential Regulation," International Journal of Central Banking, International Journal of Central Banking, vol. 2(2), May.
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    Cited by:
    1. Miklós Antal & Ardjan Gazheli & Jeroen van den Bergh, 2012. "Behavioral Foundations of Sustainability Transitions," WWWforEurope Working Papers series 3, WWWforEurope.
    2. Ding, Cherng G. & Wu, Chiu-Hui & Chang, Pao-Long, 2013. "The influence of government intervention on the trajectory of bank performance during the global financial crisis: A comparative study among Asian economies," Journal of Financial Stability, Elsevier, vol. 9(4), pages 556-564.

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