The Great Financial Crisis


a cura di: Rainer Masera

Bancaria Editrice
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International banks and the global financial system are in the midst of a crisis which can be compared to that of 1929-30.
The eight chapters of this book offer an explanation of the financial turmoil, by identifying underlying factors, proximate causes, spillover and domino effects. The crisis revealed serious oversights of monetary, regulatory and supervisory nature, as well as major corporate governance failures, in spite of clear indications of the dangers that were building up. Special attention is drawn to the procyclical impact of the current regulatory framework, notably with regard to the rise and fall of US investment banks. The first five chapters develop an analytical framework of the crisis, as it unfolded in 2007-08 (end-October 2008 is the cut-off point of the analysis and information). The following two essays describe the workings of the new main actors in the international credit process during the crisis - Sovereign Wealth and Hedge Funds - , while the last chapter offer an interpretation of the Great Depression of the 30's in light of the capital standard.
The book identifies regulatory and supervisory weaknesses and offers suggestions to build a more solid financial system. In particular, transparency and accountability of markets and intermediaries; improved functioning of derivative markets, better corporate governance, strengthened risk monitoring and control, and dampened cyclicality of capital and accounting standards are underlined and highlighted.

1. The Recent Disruptions in Financial Markets: Implications for the Implementation of Basel 2
1.1 Introduction and Summary
1.2 The Rating of Complex Structured Products
1.3 The New Scenario of Interactive Credit and Liquidity Risks
1.4 Banks' Credits to Alternative Asset Managers: Overall Risk Measures
1.5 Basel 2 and Procyclicality
1.6 Some Suggestions for the Transposition Process
1.7 Conclusions
2. Financial Turbulence and the Capital Standard Paradigm: A Sequel
2.1 The Financial Disruption in 2007: A Summary
2.2 The Capital Standard Approach: Back to Basics
2.3 An Illustration of the Key Linkages in Today's Financial Turmoil
2.3.1 Valuation
2.3.2 Credit Rating
2.3.3 Liquidity, Funding and Credit Risks
2.3.4 The Cycle and the Capital Paradigm
2.4 The Current Chapter of the Crisis: Shocks to the Banks
2.4.1 From Bank-based to Market-based Intermediation
2.4.2 Key Developments Since the Summer 2007: Banks under Pressure
2.5 Spillover and Domino Effects
2.5.1 Global Financial Markets: A Quantitative Benchmark
2.5.2 Subprime Losses and the Financial Industry: Spill-over and Domino Effects
2.6 A Road to Recovery and Concluding Remarks
2.6.1 Towards Recovery
2.6.2 Supervisory Action in the Aftermath of the Financial Turmoil's
3. Valuation, Liquidity and Capital in the Financial Industry under Stress: A Fallacy of Composition
3.1 Summary and Introduction
3.2 Base Money, Asset Liquidity/Illiquidity, External Liquidity (Funding)
3.3 Valuation Models in Crisis and the Accounting Principles
3.4 Liquidity and the Credit Channel:Traditional and New Elements
3.5 Conclusion: Banks and Capital in 2008, a Fallacy of Composition
4. The Banking Crisis and the Systemic Capital Interventions by Governments: June-October 2008
4.1 Introduction
4.2 Major Individual Banking Crises: September 2008
4.3 Overall Capital, Accounting and Liquidity Rescue Packages: October 2008
4.4 Concluding Remarks and Policy Indications
Appendix 1 ' Ways to Restore the Functioning of Interbank Markets
Appendix 2 ' ECB Recommendations on Government Guarantees on Bank Debt (October 20th 2008)
5. Deleveraging, Capital Instruments, and Capital Adequacy Measures: Key Issues in the Financial Crisis and Specific Features of Italian Banks
5.1 Introduction
5.2 From Loss Recognition to Deleveraging
5.3 The Role of Hybrid Instruments in Strengthening Capital
5.3.1 Towards European Harmonisation of Hybrid Instruments
5.3.2 Quality of Capital
5.4 Specific Features of Italian Banks
5.5 Reform Proposals Regarding Capital Regime, Capital Adequacy Measures, and Mechanism for Mitigating Pro-cyclicality
5.6 Conclusions
6. The Sovereign Wealth Funds
6.1 Introduction
6.2 SWFs: A General Overview
6.2.1 Reasons Behind SWFs
6.2.2 The Recent Years Expansion
6.3 Issues Surrounding SWFs
6.3.1 SWFs' Macroeconomic Impact
6.3.2 Implications on Global Financial Markets
6.3.3 The Absence of Common Rules and Supervision Agreements
6.4 SWFs and the 2007-2008 Financial Crisis: Investments in Bank Capital
6.5 Concluding Remarks
7. The Hedge Funds
7.1 General Overview and Definitions
7.2 Hedge Funds Industry
7.3 Hedge Funds: Benefits and Risks from their Activity
7.4 Hedge Funds: New Challenges for Risk Management and Asset Allocation
7.5 Hedge Funds and Regulatory Approaches
7.6 Hedge Funds and the Financial Turmoil 2007-2008
7.6.1 The Subprime Turmoil and the Responsibility of Hedge Funds
7.6.2 Hedge Funds' Losses and Perspectives
8. Core, Mantle and Industry: A Monetary Perspective of Banks' Capital Standards
8.1 Introduction and Summary
8.2 Hicks and Monetary Economics
8.3 Bank, Risk and Capital
8.4 Implications of (Old and New) Capital Standards for Banking and Economic Stability
Appendix 1
Appendix 2