诺贝儿恩格尔讲座-AvoidNextCrisisChengdu.pptxVIP

How to Avoid the Next GLOBAL Financial CrisisRobert Engle, NYU Stern School of BusinessSeptember 2011STERN VIEW OF DODD-FRANKReleased November 2010LESSONS FROM THE CRISISThe failure of large complex financial institutions can impose costs on the whole economyWhen they are failing, governments are in a compromised position. Unless there are liquidation or resolution mechanisms, governments need to rescue these firms.The potential of such a rescue reduces market discipline leading to excessive leverage and risk taking. Firms may “load up” on systemic risk when it is free.Regulation of systemically risky firms is the solution.IDENTIFYING SYSTEMIC RISKTWO KINDS OF RISKINDIVIDUAL RISKSYSTEMIC RISKSYSTEMIC RISK“Financial institutions are systemically important if the failure of the firm to meet its obligations to creditors and customers would have significant adverse consequences for the financial system and the broader economy.”Daniel TarulloFederal Reserve GovernorWHAT DO BANKS DO?Borrow money from depositors and short term and long term institutional investors, and combine it with cash on hand (net worth or equity value) to invest it in loans, securities, and businesses such as providing financial services. If assets payoff well, there will be additional cash available at the start of the next planning period and some will be distributed as dividends. If not, then the firm may face a liquidity or insolvency crisis. Its business will be impacted and its ability to raise new private capital will be limited.WHAT CONSTRAINS LEVERAGE?With a certain amount of cash or equity, the firm can potentially borrow extensively. This high leverage risks financial distress unless volatilities of investments are low. Thus in a low volatility environment, financial institutions are likely to increase leverage.When asset volatility increases, then asset prices decline and the equity will shrink further increasing leverage.REGULATIONIf bankruptcy of large complex financial instituti