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Finanzkrise und Reformbedarf [The Financial Crisis and Regulatory Reform]

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  • Martin Hellwig

    () (Max Planck Institute for Research on Collective Goods, Bonn)

Abstract

The report provides an analysis of the financial crisis of 2007/2008 and draws some conclusions about the need for regulatory reform. The analysis ascribes the crisis not only to problems in subprime mortgage lending and securitization, but also to excessive maturity transformation and overindebtedness of financial institutions and to flaws in financial system architecture. Because of these flaws, the initial shocks of August 2007 induced a self-supporting downward spiral in financial markets and financial institutions, which only ended in October 2008 when taxpayers were forced to provide guarantees for financial institutions. The first part of the paper provides an in-depth analysis of developments in subprime mortgage lending and securitization, focusing on problems of security design and governance, and lack of external discipline from rating agencies or investors. The second part discusses maturity transformation and excessive indebtedness and their implications for the fragility of individual institutions as well as the system as a whole. Systemic fragility is seen as a result of the interplay of price declines in malfunctioning markets, fair value accounting, an insufficiency of bank equity, and regulation induced or market induced deleveraging, putting further pressure on markets and prices. The third part of the paper goes through the different causes of adverse developments, with a distinction between individual misbehavior and systemic flaws. Among systemic flaws, the paper discusses governance problems in mortgage origination and securitization as well as banking and shortcomings of regulation, in particular, capital regulation under the model-based approach. Reform proposals concern capital regulation, liability and remuneration of bank management, procedures for dealing with banks in difficulties, and insolvency law. The latter two subjects are introduced in order to reduce the scope for submitting government to blackmail by banks in difficulties.

Suggested Citation

  • Martin Hellwig, 2010. "Finanzkrise und Reformbedarf [The Financial Crisis and Regulatory Reform]," Discussion Paper Series of the Max Planck Institute for Research on Collective Goods 2010_19, Max Planck Institute for Research on Collective Goods.
  • Handle: RePEc:mpg:wpaper:2010_19
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    Cited by:

    1. Sebastian Dullien, 2012. "Anspruch und Wirklichkeit der Finanzmarktreform: Welche G20- Versprechen wurden umgesetzt?," IMK Studies 26-2012, IMK at the Hans Boeckler Foundation, Macroeconomic Policy Institute.
    2. Karl Michael Beyer & Lars Braeutigam, 2016. "Das europaeische Schattenbankensystem: Typologisierung und die Bewertung regulatorischer Initiativen auf europaeischer Ebene," ICAE Working Papers 56, Johannes Kepler University, Institute for Comprehensive Analysis of the Economy.
    3. Lars Bräutigam & Karl Michael Beyer, 2016. "Das europäische Schattenbankensystem," Working Paper Reihe der AK Wien - Materialien zu Wirtschaft und Gesellschaft 154, Kammer für Arbeiter und Angestellte für Wien, Abteilung Wirtschaftswissenschaft und Statistik.

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