Banking Crisis

Question 1

Which business models for banks?

Answer 1

Transactions based model vs Relationship oriented model

Question 2

Transaction based model

Answer 2

Focuses on independent, often impersonal transactions, whereby financial services are commoditized and markets

Question 3

Relationship oriented model

Answer 3

invests in obtaining proprietary information about clients. Focuses on getting deposits

Question 4

Balance sheet ROM

Answer 4

Left: large loans, low cash, low securities
Right: large deposits, low equity, low money market

Question 5

Balance sheet TOM

Answer 5

Left: large securities, low loans, low cash
Right: large money markets, low equity, low deposits

Question 6

TOM vs ROM

Answer 6

TOM is grows much quicker in good times, but more leverage so much riskier. During crisis -> market and liquidity issues.

ROM grows mainly through deposits, so much slower. However, lower leverage. Easier in domestic markets

Question 7

Pre-crisis

Answer 7

1. National supervisory board was kept in place

• Selfinterested supervisors wanted to keep power
• For banks: national supervisors are more easy to manipulate than EU wide

2. Risky ingredients

• Changing business models of banks
• Same supervisory board but financial system became much bigger
• Establishment of EMU more conductive to boom-bust cycles

Question 8

Issues during the crisis

Answer 8

Evaporation of market & funding liquidity -> ECB steps in. Slow recognition & resolution of bad assets

Question 9

What are the euro specific problems?

Answer 9

1. Sovereign - banking nexus

2. Financial fragmentation

Question 10

Explain sovereign - banking nexus

Answer 10

Definition: the high interconnectedness between the health of the banking system and the level of sovereign debt in a state is called the sovereign-bank nexus.

It was a bi-directional causation so both ways

Question 11

Way 1: sovereign to bank

Answer 11

Sovereign exposure to banks. Sovereign risk, so that the country is such a bad state that it cannot pay their debt where the bank were highly invested in domestic governmental bonds

Question 12

Way 2: bank to sovereign

Answer 12

The banking system were highly invested into the governmental debts. So, banks needed to be helped via capital injections or guarantees

Question 13

Explain financial fragmentation

Answer 13

Decreasing the interconnectedness between the bans and sovereigns

Regulation was still national so countries orders other countries

Question 14

Options to stop another crises?

Answer 14

–> Banking Union

1. Prevent negative feedback loop between countries and banks
2. Prevent fragmentation of single markets along national borders and thus preserve single market
3. Break regulatory capture

Question 15

What does the Banking Union imply?

Answer 15

1. Single rulebook EBA
2. Single supervisory mechanism (SSM)
3. A single European bank resolution (ERM)

Question 16

Explain accountability principle

Answer 16

Match level of supervisory responsibilities with level of burden sharing

Question 17

Explain governance issue:

Answer 17

Single supervisory mechanism needs to be independent from national supervisors. Issue –> maybe not possible