Systemic risk and the financial crisis: a primer
How did problems in a relatively small portion of the home mortgage market trigger the most severe financial crisis in the United States since the Great Depression? Several developments played a role, including the proliferation of complex mortgage-backed securities and derivatives with highly opaque structures, high leverage, and inadequate risk management. These, in turn, created systemic risk - that is, the risk that a triggering event, such as the failure of a large financial firm, will seriously impair financial markets and harm the broader economy. This article examines the role of systemic risk in the recent financial crisis. Systemic concerns prompted the Federal Reserve and U.S. Department of the Treasury to act to prevent the bankruptcy of several large financial firms in 2008. The authors explain why the failures of financial firms are more likely to pose systemic risks than the failures of nonfinancial firms and discuss possible remedies for such risks. They conclude that the economy could benefit from reforms that reduce systemic risks, such as the creation of an improved regime for resolving failures of large financial firms.
Volume (Year): (2009)
Issue (Month): Sep ()
|Contact details of provider:|| Postal: P.O. Box 442, St. Louis, MO 63166|
Web page: http://www.stlouisfed.org/
More information through EDIRC
|Order Information:|| Web: https://files.stlouisfed.org/files/htdocs/publications/ Email: |
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Lagunoff, Roger & Schreft, Stacey L., 2001.
"A Model of Financial Fragility,"
Journal of Economic Theory,
Elsevier, vol. 99(1-2), pages 220-264, July.
- Roger Lagunoff & Stacey L. Schreft, 1998. "A Model of Financial Fragility," Game Theory and Information 9803001, EconWPA, revised 30 Apr 1998.
- Roger Lagunoff & Stacey L. Schreft, 1998. "A model of financial fragility," Research Working Paper 98-01, Federal Reserve Bank of Kansas City.
- Emmanuel Farhi & Ricardo Caballero & Pierre-Olivier Gourinchas, "undated". "Financial Crash, Commodity Prices and Global Imbalances," Working Paper 20933, Harvard University OpenScholar.
- Ricardo J. Caballero & Emmanuel Farhi & Pierre-Olivier Gourinchas, 2008. "Financial Crash, Commodity Prices and Global Imbalances," NBER Working Papers 14521, National Bureau of Economic Research, Inc.
- Gourinchas, Pierre-Oliver & Farhi, Emmanuel & Caballero, Ricardo J., 2008. "Financial Crash, Commodity Prices, and Global Imbalances," Scholarly Articles 3229095, Harvard University Department of Economics.
- Caballero, Ricardo & Farhi, Emmanuel & Gourinchas, Pierre-Olivier, 2008. "Financial Crash, Commodity Prices and Global Imbalances," CEPR Discussion Papers 7064, C.E.P.R. Discussion Papers.
- Gerald P. Dwyer & R. Alton Gilbert, 1989. "Bank runs and private remedies," Review, Federal Reserve Bank of St. Louis, issue May, pages 43-61.
- Burkhard Drees & Garry J. Schinasi & Charles Frederick Kramer & R. S Craig, 2001. "Modern Banking and OTC Derivatives Markets; The Transformation of Global Finance and its Implications for Systemic Risk," IMF Occasional Papers 203, International Monetary Fund.
- Geetesh Bhardwaj & Rajdeep Sengupta, 2008. "Where's the smoking gun? a study of underwriting standards for US subprime mortgages," Working Papers 2008-036, Federal Reserve Bank of St. Louis.
- Danielle DiMartino & John V. Duca, 2007. "The rise and fall of subprime mortgages," Economic Letter, Federal Reserve Bank of Dallas, vol. 2(nov).
- Rajdeep Sengupta & William R. Emmons, 2007. "What is subprime lending?," Monetary Trends, Federal Reserve Bank of St. Louis, issue Jun.
- Kenneth Spong, 2000. "Banking regulation : its purposes, implementation, and effects," Monograph, Federal Reserve Bank of Kansas City, number 2000bria.
- Kenneth Spong, 1994. "Banking regulation : its purpose, implementation, and effects," Monograph, Federal Reserve Bank of Kansas City, number 1994bria.
- David C. Wheelock, 2008. "The federal response to home mortgage distress: lessons from the Great Depression," Review, Federal Reserve Bank of St. Louis, issue May, pages 133-148.
- Raj Aggarwal & Kevin T. Jacques, 1998. "Assessing the impact of prompt corrective action on bank capital and risk," Economic Policy Review, Federal Reserve Bank of New York, issue Oct, pages 23-32.
- Gorton, Gary, 1985. "Clearinghouses and the Origin of Central Banking in the United States," The Journal of Economic History, Cambridge University Press, vol. 45(02), pages 277-283, June.
- Geetesh Bhardwaj & Rajdeep Sengupta, 2008. "Did prepayments sustain the subprime market?," Working Papers 2008-039, Federal Reserve Bank of St. Louis.
- Douglas D. Evanoff & Larry D. Wall, 2002. "Subordinated debt and prompt corrective regulatory action," FRB Atlanta Working Paper 2002-18, Federal Reserve Bank of Atlanta.
- Douglas D. Evanoff & Larry D. Wall, 2003. "Subordinated debt and prompt corrective regulatory action," Working Paper Series WP-03-03, Federal Reserve Bank of Chicago.
- Timberlake, Richard H, Jr, 1984. "The Central Banking Role of Clearinghouse Associations," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 16(1), pages 1-15, February.
- Merton, Robert C., 1977. "An analytic derivation of the cost of deposit insurance and loan guarantees An application of modern option pricing theory," Journal of Banking & Finance, Elsevier, vol. 1(1), pages 3-11, June. Full references (including those not matched with items on IDEAS)