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Instabile Finanzmärkte

  • Günter Franke
  • Jan P. Krahnen

The paradigm of self-stabilizing, equilibrating financial markets, respected for a long time, is seriously challenged by the recent financial crisis. Despite sophisticated bank risk management and comprehensive bank supervision interbank and corporate bond markets collapsed in 2007-2009. The state interventions required for saving banks are without precedent in modern economic history. In this essay we attempt to explain financial market instability. Key determinants of the crisis are, in our opinion, weaknesses of the information architecture which should provide credible information for investors. Three determinants of instability are identified: first, the utilization of debt instruments combined with high degrees of corporate leverage; second, the tradeability of securities combined with increased risk taking; and third, the increased degree of complexity of financial products and networks, combined with more homogeneous asset and risk structures of banks. These determinants strengthen financial system vulnerability and the role of the information architecture. We discuss several requirements for a meaningful regulatory reform, leaving out incentive issues (which are treated in Franke/Krahnen 2009), namely credible provision of information, macro-prudential supervision, robust capital standards, as well as a limitation of risk clustering in derivative markets. Copyright 2009 die Autoren Journal compilation 2009, Verein für Socialpolitik und Blackwell Publishing Ltd.

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Article provided by Verein für Socialpolitik in its journal Perspektiven der Wirtschaftspolitik.

Volume (Year): 10 (2009)
Issue (Month): 4 (November)
Pages: 335-366

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Handle: RePEc:bla:perwir:v:10:y:2009:i:4:p:335-366
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  1. Krahnen, Jan Pieter & Wilde, Christian, 2008. "Risk transfer with CDOs," CFS Working Paper Series 2008/15, Center for Financial Studies (CFS).
  2. Franke, Günter & Krahnen, Jan Pieter, 2005. "Default risk sharing between banks and markets: The contribution of collateralized debt obligations," CFS Working Paper Series 2005/06, Center for Financial Studies (CFS).
  3. Franke, Günter & Krahnen, Jan Pieter, 2008. "The future of securitization," CFS Working Paper Series 2008/31, Center for Financial Studies (CFS).
  4. Günter Franke & Markus Herrmann & Thomas Weber, 2007. "Information asymmetries and securitization design," CoFE Discussion Paper 07-10, Center of Finance and Econometrics, University of Konstanz.
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  7. Douglas W. Diamond & Raghuram G. Rajan, 2001. "Liquidity Risk, Liquidity Creation, and Financial Fragility: A Theory of Banking," Journal of Political Economy, University of Chicago Press, vol. 109(2), pages 287-327, April.
  8. Townsend, Robert M., 1979. "Optimal contracts and competitive markets with costly state verification," Journal of Economic Theory, Elsevier, vol. 21(2), pages 265-293, October.
  9. Hyman P. Minsky, 1992. "The Financial Instability Hypothesis," Economics Working Paper Archive wp_74, Levy Economics Institute.
  10. Ricardo J. Caballero & Arvind Krishnamurthy, 2008. "Collective Risk Management in a Flight to Quality Episode," Journal of Finance, American Finance Association, vol. 63(5), pages 2195-2230, October.
  11. Jensen, Michael C, 1986. "Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers," American Economic Review, American Economic Association, vol. 76(2), pages 323-29, May.
  12. Krahnen, Jan Pieter, 2005. "Der Handel von Kreditrisiken: Eine neue Dimension des Kapitalmarktes," CFS Working Paper Series 2005/05, Center for Financial Studies (CFS).
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