Lecture on Ensuring Banking Stability (part I)

Question 1

What two views opposed each others in the debate on financial (in)stability?

Answer 1

Neo Classical (financial stability) vs Post Keynesian (financial stability)

Question 2

What can financial fragility result in?

Answer 2

Financial stability and financial instability

Question 3

Why did moral hazard occur in the banking system?

Answer 3

Existence of explicit and implicit guarantees (too big to fail)

Question 4

How do bond holders perceive the riskiness of a German bond vs Greek bond?

Answer 4

As about equal (due to guarantees and bail outs)

Question 5

What happened very soon after the first problems emerged in August 2007, just before the financial crisis?

Answer 5

Banks stopped lending to each other

Question 6

What did Basel 3 lead to?

Answer 6

Substantial increase of bank capital requirements

Question 6

What does the BRRD establish?

Answer 6

Harmonized procedures for restructuring problem banks

Question 6

What is the third pillar of the European Banking Union?

Answer 6

Creation of a single Deposit Guarantee Scheme (DGS)

Question 6

What will shape the future role and size of ESM, SRM and DGS?

Answer 6

Crisis management and recognition of losses on legacy assets

Question 6

What are two ways of dealing with financial distress or failure in banks or large financial institutions

Answer 6

Bail out by national taxpayers/ESM or bail in of
shareholders and unsecured creditors

Question 7

What do Benink & Huizinga in FT (May 7, 2013) propse?

Answer 7

Credible stress test for banks in order to determine for banks their capital shortages.

Question 8

What style inertia should be avoided regarding banking?

Answer 8

Japanese-style intertia

Question 9

What are two implications from the statement by the European Shadow Financial Regulatory Committee?

Answer 9

• Adopt temporary intervention laws, in each member state, allowing bail-in
• Adopt early intervention and resolution contracts between ECB and national authorities

Question 10

What is Draghi’s vision on bail-ins when a bank is failing?

Answer 10

Supportive of bail-in when a bank is failing but against a forced conversion of junior debt into equity when a bank needs to strengthen its capital buffers under the AQR.

Question 10

What revised state aid rule was introduced by European Commissioner Almunia?

Answer 10

Bail-in of junior debt of a bank is required before any taxpayer support

Question 11

What is essential for establishing credibility as Europe’s new bank supervisor?

Answer 11

Recognition of hidden losses on banks’ balance sheets

Question 12

What should the ECB do if the national supervisors do not cooperate with the credible test, according to Benink & Huizinga?

Answer 12

The ECB should threaten not to supervise their banks