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Bank Failures: The Limitations of Risk Modelling

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Patrick Honohan

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Abstract

Overconfidence on the part of bankers and regulators in mechanical risk management models is an important and distinctive driver of bank failures in the current crisis. This paper illustrates the process by drawing on brief case studies of a handful of the biggest failures and losses. There are significant implications for a more holistic and less mechanical approach to risk management and prudential regulation.

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Paper provided by IIIS in its series The Institute for International Integration Studies Discussion Paper Series with number iiisdp263.

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Date of creation: 01 Oct 2008
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Handle: RePEc:iis:dispap:iiisdp263

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  1. Honohan, Patrick & Klingebiel, Daniela, 2003. "The fiscal cost implications of an accommodating approach to banking crises," Journal of Banking & Finance, Elsevier, vol. 27(8), pages 1539-1560, August. [Downloadable!] (restricted)
  2. Daniel O. Beltran & Laurie Pounder & Charles Thomas, 2008. "Foreign exposure to asset-backed securities of U.S. origin," International Finance Discussion Papers 939, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
  3. Martin Cihák & Klaus Schaeck, 2007. "How Well Do Aggregate Bank Ratios Identify Banking Problems?," IMF Working Papers 07/275, International Monetary Fund. [Downloadable!]
  4. Yuliya Demyanyk & Otto Van Hemert, 2007. "Understanding the subprime mortgage crisis," Supervisory Policy Analysis Working Papers 2007-05, Federal Reserve Bank of St. Louis. [Downloadable!]
  5. Raghuram Rajan & Giovanni Dell'Ariccia & Enrica Detragiache, 2005. "The Real Effect of Banking Crises," IMF Working Papers 05/63, International Monetary Fund. [Downloadable!]
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  6. Charles Goodhart, 2004. "Bank Regulation and Macroeconomic Fluctuations," Oxford Review of Economic Policy, Oxford University Press, vol. 20(4), pages 591-615, Winter.
  7. William Poole, 2007. "The GSEs: where do we stand?," Speech, Federal Reserve Bank of St. Louis. [Downloadable!]
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  8. Markus K. Brunnermeier, 2008. "Deciphering the Liquidity and Credit Crunch 2007-08," NBER Working Papers 14612, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  9. Dell''Ariccia, Giovanni & Igan, Deniz & Laeven, Luc, 2008. "Credit Booms and Lending Standards: Evidence From The Subprime Mortgage Market," CEPR Discussion Papers 6683, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  10. Robert Eisenbeis & W. Frame & Larry Wall, 2007. "An Analysis of the Systemic Risks Posed by Fannie Mae and Freddie Mac and An Evaluation of the Policy Options for Reducing Those Risks," Journal of Financial Services Research, Springer, vol. 31(2), pages 75-99, June. [Downloadable!] (restricted)
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  11. Edward E. Leamer, 2007. "Housing is the business cycle," Proceedings, Federal Reserve Bank of Kansas City, pages 149-233. [Downloadable!]
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  12. Kristopher Gerardi & Adam Hale Shapiro & Paul S. Willen, 2007. "Subprime outcomes: risky mortgages, homeownership experiences, and foreclosures," Working Papers 07-15, Federal Reserve Bank of Boston. [Downloadable!]
  13. Gerard Caprio & Patrick Honohan, . "Banking Crises," Department of Economics Working Papers 2008-07, Department of Economics, Williams College. [Downloadable!]
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  14. Andy Mullineux, 2008. "British banking regulation and supervision: between a rock and a hard place," International Economics and Economic Policy, Springer, vol. 4(4), pages 363-370, February. [Downloadable!] (restricted)
  15. Patrick Honohan, 1997. "Banking system failures in developing and transition countries: Diagnosis and predictions," BIS Working Papers 39, Bank for International Settlements. [Downloadable!]
  16. Nicola Cetorelli & Linda S. Goldberg, 2008. "Banking Globalization, Monetary Transmission, and the Lending Channel," NBER Working Papers 14101, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  17. Darrell Duffie, 2008. "Innovations in credit risk transfer: implications for financial stability," BIS Working Papers 255, Bank for International Settlements. [Downloadable!]
  18. Patrick Honohan, 2008. "Risk Management and the Costs of the Banking Crisis," The Institute for International Integration Studies Discussion Paper Series iiisdp262, IIIS. [Downloadable!]
  19. Carmen M. Reinhart & Kenneth S. Rogoff, 2008. "Is the 2007 US Sub-prime Financial Crisis So Different? An International Historical Comparison," American Economic Review, American Economic Association, vol. 98(2), pages 339-44, May. [Downloadable!]
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  20. Danielle DiMartino & John V. Duca, 2007. "The rise and fall of subprime mortgages," FRBSF Economic Letter, Federal Reserve Bank of San Francisco, issue Nov. [Downloadable!]
  21. Dwight Jaffee, 2003. "The Interest Rate Risk of Fannie Mae and Freddie Mac," Journal of Financial Services Research, Springer, vol. 24(1), pages 5-29, August. [Downloadable!] (restricted)
  22. Tobias Adrian & Hyun Song Shin, 2008. "Liquidity and leverage," Staff Reports 328, Federal Reserve Bank of New York. [Downloadable!]
  23. Adam B. Ashcraft & Til Schuermann, 2008. "Understanding the securitization of subprime mortgage credit," Staff Reports 318, Federal Reserve Bank of New York. [Downloadable!]
  24. Andreas Lehnert & Wayne Passmore & Shane Sherlund, 2008. "GSEs, Mortgage Rates, and Secondary Market Activities," The Journal of Real Estate Finance and Economics, Springer, vol. 36(3), pages 343-363, April. [Downloadable!] (restricted)
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  25. Honohan, Patrick, 2002. "Comment on "Costs of banking system instability: Some empirical evidence"," Journal of Banking & Finance, Elsevier, vol. 26(5), pages 857-860, May. [Downloadable!] (restricted)
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