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A perspective on the symptoms and causes of the financial crisis

  • Cabral, Ricardo
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    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.

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    File URL: http://www.sciencedirect.com/science/article/pii/S0378426612002270
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    Article provided by Elsevier in its journal Journal of Banking & Finance.

    Volume (Year): 37 (2013)
    Issue (Month): 1 ()
    Pages: 103-117

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    Handle: RePEc:eee:jbfina:v:37:y:2013:i:1:p:103-117
    Contact details of provider: Web page: http://www.elsevier.com/locate/jbf

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