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

  • Rötheli, Tobias F.
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    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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    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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    1. Jose A. Lopez, 2008. "What is liquidity risk?," FRBSF Economic Letter, Federal Reserve Bank of San Francisco, issue oct24.
    2. 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.
    3. Ben S. Bernanke, 2008. "Risk management in financial institutions," Proceedings 1070, Federal Reserve Bank of Chicago.
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    5. Tobias Adrian & Hyun Song Shin, 2009. "The shadow banking system: implications for financial regulation," Staff Reports 382, Federal Reserve Bank of New York.
    6. J. Bradford De Long & Andrei Shleifer & Lawrence H. Summers & Robert J. Waldmann, . "Noise Trader Risk in Financial Markets," J. Bradford De Long's Working Papers _124, University of California at Berkeley, Economics Department.
    7. 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.
    8. Foos, Daniel & Norden, Lars & Weber, Martin, 2010. "Loan growth and riskiness of banks," Journal of Banking & Finance, Elsevier, vol. 34(12), pages 2929-2940, December.
    9. Buiter, Willem H., 2007. "Lessons from the 2007 Financial Crisis," CEPR Discussion Papers 6596, C.E.P.R. Discussion Papers.
    10. 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.
    11. Goodhart, C., 2008. "Liquidity risk management," Financial Stability Review, Banque de France, issue 11, pages 39-44, February.
    12. 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.
    13. Thomas M. Humphrey, 1989. "Lender of last resort: the concept in history," Economic Review, Federal Reserve Bank of Richmond, issue Mar, pages 8-16.
    14. Zingales Luigi, 2008. "Plan B," The Economists' Voice, De Gruyter, vol. 5(6), pages 1-5, October.
    15. Raghuram G. Rajan, 1994. "Why Bank Credit Policies Fluctuate: A Theory and Some Evidence," The Quarterly Journal of Economics, Oxford University Press, vol. 109(2), pages 399-441.
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