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Deleveraging, Traditional versus Capital Markets Banking and the Urgent Need to Separate and Recapitalise G-SIFI Banks

Author

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  • Adrian Blundell-Wignall
  • Paul Atkinson
Abstract
Since the crisis, even with massive support from governments and central banks, widespread regulatory changes and promises from bank executives to improve the governance of risk, the world continues to see failures of Globally Systemically Important Financial Institutions (G-SIFIs, like Dexia), and huge losses (most recently from JP Morgan). Banks refuse to lend to each other, the central banks have become the interbank market and ‘bad deleveraging’ bears down on the economy forcing job losses in small- and medium-sized companies. ‘Good deleveraging’ occurs via building capital, and in this respect the US approach to dealing with the crisis provides something of a lesson that policy makers in Europe should take note of. With respect to regulations, the paper shows that capital and liquidity rules create a bias against lending to the enterprise sector (that drives jobs and economic growth). With respect to G-SIFIs, the paper shows how movements in their balance sheets are dominated by derivatives, the exposure to which varies with the cycle in risk. Netting of derivatives provides no protection against market risk, and the collateral and margin calls associated with these swings is both pro-cyclical and dangerous. The paper argues the OECD case that the best way to deal with all of these issues – both materially reducing the risk that arises from too-big-to fail while encouraging well-capitalised retail banks get on with the job of lending to create jobs – is to separate retail banking from securities business and ensure the former is (particularly in Europe) well capitalised. In this respect the paper argues that the non-operating holding company approach with ring-fenced subsidiaries (close to the Vickers proposal in the UK) is perhaps a better model than the US Volcker rule.

Suggested Citation

  • Adrian Blundell-Wignall & Paul Atkinson, 2012. "Deleveraging, Traditional versus Capital Markets Banking and the Urgent Need to Separate and Recapitalise G-SIFI Banks," OECD Journal: Financial Market Trends, OECD Publishing, vol. 2012(1), pages 7-44.
    • Handle: RePEc:oec:dafkad:5k91hbvgfq20
    DOI: 10.1787/fmt-2012-5k91hbvgfq20
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    Citations

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    Cited by:

    1. Aida Caldera Sánchez & Morten Rasmussen & Oliver Röhn, 2016. "Economic Resilience: What Role for Policies?," Journal of International Commerce, Economics and Policy (JICEP), World Scientific Publishing Co. Pte. Ltd., vol. 7(02), pages 1-44, June.
    2. William R. White, 2014. "The Prudential Regulation of Financial Institutions: Why Regulatory Responses to the Crisis Might Not Prove Sufficient," OECD Economics Department Working Papers 1108, OECD Publishing.
    3. Hryckiewicz, Aneta & Kozłowski, Łukasz, 2017. "Banking business models and the nature of financial crisis," Journal of International Money and Finance, Elsevier, vol. 71(C), pages 1-24.
    4. MIRCEA, Ionuţ, 2014. "Is Sustainable Banking A Solution?," Journal of Financial and Monetary Economics, Centre of Financial and Monetary Research "Victor Slavescu", vol. 1(1), pages 108-116.
    5. Emilios Avgouleas, 2015. "Bank Leverage Ratios and Financial Stability: A Micro- and Macroprudential Perspective," Economics Working Paper Archive wp_849, Levy Economics Institute.
    6. Ben Naceur, S. & Marton, Katherin & Roulet, Caroline, 2018. "Basel III and bank-lending: Evidence from the United States and Europe," Journal of Financial Stability, Elsevier, vol. 39(C), pages 1-27.
    7. Mimoza Shabani & Carmela D'Avino, 2020. "A new approach to measuring universal banking," Bulletin of Economic Research, Wiley Blackwell, vol. 72(4), pages 353-379, October.
    8. Oliver Denk & Sebastian Schich & Boris Cournède, 2015. "Why implicit bank debt guarantees matter: Some empirical evidence," OECD Journal: Financial Market Trends, OECD Publishing, vol. 2014(2), pages 63-88.
    9. Boris Cournède & Oliver Denk & Peter Hoeller, 2015. "Finance and Inclusive Growth," OECD Economic Policy Papers 14, OECD Publishing.
    10. Michel Crouhy & Dan Galai, 2018. "Are Banks Special?," Quarterly Journal of Finance (QJF), World Scientific Publishing Co. Pte. Ltd., vol. 8(04), pages 1-19, December.

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