B., and M. Campello (2002), “Borrowers' financial constraints and the transmission of monetary policy: evidence from financial conglomerates”, Federal Reserve Bank of New York, Staff Reports: 153. BIS Review 149/2007  5  The fourth element in the story, underway since August, has been distributional. Banks relatively reliant on wholesale funding have bid up for funds. But doing so has been taken as an adverse signal, prompting further rationing of wholesale money market lending at term maturities and potentially deterring the strong from entering the market; this is what is known as a “Lemons” problem 13 . In the United Kingdom, since August, mortgage approvals and secured lending have declined by more at the medium-sized mortgage banks and specialist lenders than at the largest UK banks, partly due to Northern Rock (Charts 14-15). This was symmetric. Their mortgage portfolios grew faster over the previous years. All told, this looks like a manifestation of the Kashyap and Stein finding, in various non-UK settings, that lending is more cyclically variable at banks that start off with weaker balance sheets; 14 or, as I would prefer to put it, with concentrated income streams and/or funding sources. Won’t the macroeconomic effect of this be dampened by the bigger and more diversified banks picking up the slack? It is important to distinguish the longer term from the near term. The longer-term impact will depend on whether the structure of the industry shifts. The securitisation boom seems to have altered the terms of trade in UK banking for a while.

This was perhaps the response to rising income inequality, as emphasized by Rajan (2010), and the lack of other policies to correct this problem in a fast and efficient way. Ironically, the crisis affected more intensely precisely those that were supposed to benefit from “financial inclusion.” There are many other cases in which well intentioned developments are implemented through weak policies. Take the case of interest rate ceilings. In order to promote fairness, many countries introduce limits on the interest rate on loans. This policy attempts principally to protect people with disadvantages and allow them to participate in the financial system. If this ceiling is set low enough, it may end up generating exclusion rather than lower financial costs for households, who may end up paying much higher interest rates in informal credit markets. This is not the place to analyze all the causes and culprits of the crisis, but it is worth discussing certain aspects that are frequently singled out by the general public. First and foremost, the crisis was caused by the irresponsible behavior of the financial industry. The structure of incentives was unsuitable. It led to excessive risk-taking without proper risk management. Compensation was heavily biased towards deal-making, regardless of the quality of the deals. Commissions and fees were a very important component of the compensation scheme. In the end, all that mattered was granting credit indiscriminately, maximizing packaging and selling securities, etc. This was at the foundation of the originate-and-distribute model of financial services, and served to increase leverage to unsustainable levels.