Do Global Banks Spread Global Imbalances?

Original source: SimoleonSense.com .

H/T HLS

Introduction (via HLS)

In our paper, Do Global Banks Spread Global Imbalances? The Case of Asset-Backed Commercial Paper During the Financial Crisis of 2007-09, forthcoming in the IMF Economic Review, we provide evidence that global imbalances cannot explain the geography of the financial crisis of 2007-09. In particular, they cannot explain why surplus countries such as Germany and their banks were as heavily involved as the US banks in the business of creating risk-free securities and concentrating risks in the process.

Additional Excerpt (via HLS)

We conclude that while it is useful for future reforms to take heed on the issue of reducing global imbalances, reforms should also address the increasing propensity of the global banking sector to manufacture tail risks (or “carry trade” style payoffs). Maturity mismatch of the ABCP conduits and their effective recourse to sponsor bank balance sheets can be considered a canonical example of such propensity. Addressing this propensity might reduce incidence of global financial crises even in a world where global imbalances persist. While many reforms to the financial sector are being proposed, one seems most important to us: the quality of enforcement of capital requirements (and not just their level). Not allowing global financial flows to find their way into the poorly-capitalized shadow banking world of ABCP conduits might have mitigated risk-taking by global banks. This would have enabled financial regulators worldwide to effect a (relatively) market-based correction to the threat of global imbalances. It is sometimes easier to guard against a disease than to eradicate it. Global imbalances may be a case in point.

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