SLIDE 1
Average leverage of systemic banks and investment banks
1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 5 10 15 20 25 30 35 40 Leverage I-banks: GS-MS-LEH-BSC-MER Banks: C-BAC-JPM*-WFC
Prone to Fail The Pre-Crisis Financial System Darrell Duffie GSB - - PowerPoint PPT Presentation
Prone to Fail The Pre-Crisis Financial System Darrell Duffie GSB - - PowerPoint PPT Presentation
Prone to Fail The Pre-Crisis Financial System Darrell Duffie GSB Stanford The Financial Crisis at 10 NBER Summer Institute Cambridge, July 2018 Drawing from joint work with Antje Berndt and Yichao Zhu Average leverage of systemic banks and
SLIDE 2
SLIDE 3
Pre-crisis big-bank credit spreads were tiny
2002 2004 2006 2008 2010 2012 2014 2016 2018 50 100 150 200 250 LBOR-OIS spread (basis points)
One-year USD LIBOR-OIS spread. Data source: Bloomberg.
SLIDE 4
Big-bank pre-crisis asset growth
1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 1 2 3 4 5 6 7 8 9 10 11
Total assets (trillions of dollars) JPM*-BAC-C-WFC GS-MS-MER-LEH-BSC
Total assets of nine bank and I-bank holding companies. Data source: 10K filings.
SLIDE 5
Pre-crisis conditions were set for an unstable core financial system
big banks vulnerable to shocks creditors believe in bailouts? market discipline fails regulators supervise weakly? yes yes
SLIDE 6
What were they thinking?
Potential explanations:
- 1. Irrationally low belief in disaster scenarios (Gennaioli and Shleifer, 2018).
- 2. Fragile by design (Calomiris and Haber, 2014).
- 3. Dogmatic reliance on market discipline (Greenspan, 1997).
- 4. It was too difficult, within reason, for regulators to detect the problems.
- 5. Failure to assign regulators a clearer financial-stability mandate (Kohn, 2014).
SLIDE 7
Investment banks’ net capital in 2005, versus SEC required net capital
MS LEH BSC MER GS 0.5 1 1.5 2 2.5 3 3.5 4 4.5 5 Net capital ($ billions) Net capital Early warning requirement Required net capital
Data source: 10K filings.
SLIDE 8
Heavy U.S. dependence on credit supplied through bond markets
1985 1990 1995 2000 2005 2010 2015 10% 20% 30% 40% 50% 60% 70% 80%
Credit provided via capital markets China UK Japan US Eurozone
Data source: Bank for International Settlements.
SLIDE 9
Look for short-term debt in the core of the financial system “Private financial crises are everywhere and always due to problems
- f short-term debt.”
– Douglas Diamond (2013)
SLIDE 10
Pre-crisis buildup of primary dealers’ short-term repo financing
2002 2004 2006 2008 2010 2012 0.5 1 1.5 2 2.5 3
Repos outstanding (trillions of dollars)
- vernight and continuing
term
Rolling quarterly average of repos of primary dealers. Data source: Federal Reserve Bank of New York.
SLIDE 11
Pre-crisis securities financing in U.S. money markets
Fed banks MM funds major dealers cash pools retail
- ther dealers
securities repo repo
SLIDE 12
With exposure to intra-day credit from tri-party repo agent banks
Fed banks MM funds major dealers cash pools retail tri-party
- ther dealers
securities repo repo
SLIDE 13
Gross market value of OTC derivatives
1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 5 10 15 20 25 30 35
Market value (trillions of dollars)
Data source: Bank for International Settlements.
SLIDE 14
Swap market turnover survives post-crisis regulation
2001 2004 2007 2010 2013 2016 0.5 1 1.5 2 2.5 3
Daily turnover (trillions of dollars)
Data source: Bank for International Settlements: Turnover of OTC interest rate derivatives.
SLIDE 15
The solvency buffers of big U.S. banks have gotten much larger
2002 2004 2006 2008 2010 2012 2014 2016 2018 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1 1.1 Solvency ratio
Tangible equity divided by an estimate of the standard deviation of the annual change in asset value. Asset-weighted average of nine banks and I-banks. Source: Berndt, Duffie, and Zhu (2018).
SLIDE 16
Estimated 5-year CDS rates of a big bank at a fixed distance to default
12/31/2002 12/31/2004 12/29/2006 12/31/2008 12/31/2010 12/31/2012 12/31/2014 12/30/2016 50 100 150 200 250 300
Credit spread (basis points)