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A perspective on the symptoms and causes of the financial crisis

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  • Cabral, Ricardo

Abstract

Prior to the 2007–2008 financial crisis, banking sector profits were very high but the profitability of financial intermediation was poor. Using a novel model of banking, this article argues that the high profits were achieved through balance sheet expansion and growing default, liquidity, and term risk mismatches between assets and liabilities. As a result, large banks’ financial leverage rose as they became less liquid, setting the conditions for a systemic banking crisis. This article argues that the increase in financial leverage was possible due to misguided changes in the regulatory framework, specifically, the Basel I capital accord and reductions in reserve requirements. Finally, this article overviews and assesses the policy response in the aftermath of the crisis.

Suggested Citation

  • Cabral, Ricardo, 2013. "A perspective on the symptoms and causes of the financial crisis," Journal of Banking & Finance, Elsevier, vol. 37(1), pages 103-117.
  • Handle: RePEc:eee:jbfina:v:37:y:2013:i:1:p:103-117
    DOI: 10.1016/j.jbankfin.2012.08.005
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    References listed on IDEAS

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    Cited by:

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    3. Mielus Piotr & Mironczuk Tomasz & Zamojska Anna, 2016. "Basis Risk and Net Interest Income of Banks," Folia Oeconomica Stetinensia, Sciendo, vol. 16(2), pages 40-59, December.
    4. Douglas da Rosa München & Herbert Kimura, 2020. "Regulatory Banking Leverage: what do you know?," Working Papers Series 540, Central Bank of Brazil, Research Department.

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    More about this item

    Keywords

    Financial crisis; Financial intermediation; Basel accords; Reserve requirements; G20 Leaders’ Summits; Dodd-Frank Act;
    All these keywords.

    JEL classification:

    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
    • G01 - Financial Economics - - General - - - Financial Crises
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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