Ten Years After: Reflections on the Global Financial Crisis

The “Ten Years After” Brief contains summaries of research articles and central banker discussions from the “2008 Financial Crisis: A Ten-Year Review” conference that took place in November 2018 in New York City. The full versions of the articles were published by the Annual Review of Financial Economics, and actual live conference sessions can be accessed via the CFA Institute website. The summaries in the Brief, which are short descriptions of the original articles, are intended for practitioners and investors interested in learning about the current status of academic research related to the 2008 financial crisis. An edited and annotated transcript of a conversation between central bankers Ben Bernanke, Lord Mervyn King, and Jean-Claude Trichet about the crisis makes the Brief of particular interest. The 11 articles summarized in the Brief provide an overview of recent research that not only offers insights into the 2008 crisis but also describes lines of inquiry and findings that go beyond understanding the origins of the global financial crisis. In “Deglobalization: The Rise of Disembedded Unilateralism,” Harold James describes the growing opposition to globalization in the wake of the crisis, with an associated decline in cross-border investing and international trade. However, he notes that opposition to globalization may lead to its reform and resurgence. Gary Gorton relates financial crises to the vulnerability of short-term debt, broadly defined. This vulnerability is inherent in market economies because maturity transformation is an essential function of banks, which in turn are necessary for market economies to exist. Therefore, financial crises have occurred repeatedly over history. Christopher L. Foote and Paul S. Willen review research on mortgage default, which policymakers need to understand better to more effectively respond to financial crises. They note that research supports the view that payment forbearance is an effective way to reduce default. However, defaults by individual borrowers are difficult to predict because they depend on loss-of-income shocks that are unforecastable. Manuel Adelino, Antoinette Schoar, and Felipe Severino indicate why a proper diagnosis of the reasons for the 2008 financial crisis is necessary to prevent a repeat in the future. They analyze the origins of the crisis and unveil evidence that contradicts some popular beliefs. They conclude that regulators should consider time-varying capital requirements and countercyclical loan-to-value requirements. Matthew Richardson, Kermit L. Schoenholtz, and Lawrence J. White critically discuss the following three levers of recent prudential regulation: capital requirements, liquidity requirements, and regulation of scope. They emphasize that regulators should select the most cost-effective tools to reduce systemic risk. Andrew Metrick and June Rhee provide an overview of reforms that occurred after the financial crisis, organizing their presentation into three types of reforms: preventative, emergency, and restructuring powers. They note that the main effect of the new reforms has been to shift power from emergency into preventative and restricting powers but that some of the new rules are complex and untested. Deborah Lucas reviews the cost and beneficiaries of the bailouts that took place during the 2008 financial crisis, providing rigor and clarity to the controversy surrounding those bailouts. Tobias Adrian, John Kiff, and Hyun Song Shin review the causes of bank deleveraging following the crisis, making the case that reasons other than increased regulation have been the main cause of deleveraging. Furthermore, they organize post-2008 regulatory reforms around four objectives and conclude that further research is needed on their unintended consequences. Zhiguo He and Arvind Krishnamurthy offer an introduction to the new and growing literature on asset pricing models based on frictions incurred by financial intermediaries. Robert Engle reviews the impact on financial crises of undercapitalization of financial firms and of the ability of the financial system to withstand the risk created by undercapitalized institutions (risk capacity). He shows evidence that systemic risk has been reduced dramatically since the financial crisis. Stephen G. Ryan reviews recent research connecting financial reporting and financial stability. Specifically, he organizes and reviews the evidence around the following three channels: capital requirement violations, banks’ risk management and control systems, and the discipline of markets and regulators over banks. In the “Central Banker Roundtable,” which was moderated by Stanley Fischer, central bankers Ben Bernanke, Lord Mervyn King, and Jean-Claude Trichet provided their views and firsthand accounts of the global financial crisis. The roundtable touched on such topics as the cause and depth of the crisis, the tools available to fight it, the speed of international transmission, and the unprecedented informal coordination among central banks. Other topics covered included the need to regulate maturity transformation and moral hazard and the future of central bank independence. The topics covered in the roundtable and in the research articles are intertwined and complementary. As a result, the Brief provides an easy-to-read, yet rigorous, assessment of the most relevant research on the global financial crisis, 10 years after it occurred.