by Tamara Ayrapetova, on Sep 21, 2016 4:07:43 PM
Despite the increasing regulation systemic risk will not decrease unless on and off balance sheet activities are suitably addressed.
In the aftermath of the financial crisis of 2007-2008, one of the main questions that has been hanging in the air is how to prevent the same event happening in the nearest future. The answer to this question is complex and can be partially found in the area of banking regulation. During the crisis of 2007-2008, and slightly before that (2004-2007), the balance sheets of the banks were evolving in their capital structure by gaining extreme amounts of leverage that were mainly situated in the off-balance sheet transactions. Due to ultra-low interest rates that were promoted by the Federal Reserve at this time, banks saw an opportunity for having a regulatory arbitrage through creating new securitized products such as CDOs and CDSs. As the result, of this opportunities banks have accumulated high exposures to price changes of the underlying assets and have put the overall financial system under substantial risk of default.
In this article, written for the Banking Journal “Bankovnictvi”, the authors are trying to explore the drivers of financial crisis such as leverage and the change of notion of systemic risk. The article highlights the importance of future systemic approach to banking regulation and stipulates the urge of consistent application of those regulations across the financial markets - both developing and emerging.
Author: Sherrihan Radi and Stefano Cavagnetto
Date: May 2016
Major/Field: Banking, Finance, Banking Regulation
Type: Faculty Research [Article]
