Marco Onado 8196 Comparative financial systems by hcj

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									          Marco Onado
20264 Comparative financial systems


       Course presentation
    Academic Year 2011 – 2012
        February 13th, 2012
    Objectives

   Analyze the conceptual framework for comparing financial
    systems across countries and over time (in particular
    looking at the main channels of intermediation: banks vs
    financial markets).
   Review the main characteristics of the financial systems of
    the industrialised countries looking at the households’
    financial assets and the corporate sector’s financial
    liabilities.
   Discuss – as significant case studies – the strategies of
    important global players of different countries, both
    American and European.
   Analyze the long-term causes and implications of the 2007-
    09 financial crisis


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          Questions we will try to answer

   What are the main characteristics of a financial system and how can
    they be measured?
   Why structural characteristics differ across countries and over time?
   What are the main causes (macro and micro) of the financial crisis?
   Why the crisis spread to the Government bond market and to the
    banking systems, particularly in Europe?
   What is the outlook at the beginning of 2012 for the main European
    banks?
   What does that mean from the point of view of strategic decisions of
    financial intermediaries which want to be international or global?




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    Main parts


   General issues (role of the financial system;
    literature on comparing financial systems);
   Anatomy of a crisis (the effects on main financial
    systems and the main causes of the crisis);
   The main weaknesses from a macro and a micro
    point of view;
   The strategic issues for the European banks.




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    References


   Teaching material
      In particular Imf, Global financial stability report;

       Bank of England and Ecb, Financial Stability
       Review
   Further reading
   Presentations of each lecture
   All documents are available on the mypage site
   Office hours: Wed 10:30 – 12:00
   marco.onado@unibocconi.it (no answers on
    information available in the syllabus)
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    Valuation


   Final written test:
      6 multiple choice questions (2 point each, -1 for

       wrong answers)
      2 open questions (10 points each)

      >30 points = 30 cum laude.

      Time: 70 minutes.

   Bonuses can be obtained through active
    participation and discussion.
   Individual essays (as a part or alternative to the
    final test) can be assigned to attending students.
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    The financial crisis


   What is a financial crisis?
   Are financial crises fortuitous accidents?
   What are the costs of the present crisis?
   Where are we now?




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    What is a financial crisis?
    From Rheinhart-Rogoff, This time is different

   Crises defined by quantitative thresholds
      Inflation crises

      Currency crashes

      Currency debasements

      Bursting of asset price bubbles

   Crises defined by events
          Banking crises (bank runs)

               Financial distress (milder)

               Systemic (severe)

          Debt crises

               Domestic

               External


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    A focus on banking crises


   High frequency
      266 banking crises since 1800

      105 since 1945

   Whether calculations are done from 1800 or from
    1945 on average there are no significcant
    differences in either the incidence or the number
    of banking crises between advanced and
    emerging economies



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    The common denominator of financial
    crises

   Excessive debt accumulation, whether it be by
    Government, banks, corporations or consumers,
    often poses greater systemic than it seems
    during a boom
   Large-scale debt buildups pose risks because
    they make an economy vulnerable to crises of
    confidence, particularly when debt is short-term
    and needs to be constantly refinanced




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    An important warning


   Debt is a wonderful thing but it must be repaid
   Von Mises: It may sometimes be expedient for a
    man to heat the stove with his furniture. But he
    should not delude himself by believing that he
    has discovered a wonderful new method of
    heating the premises
   The Economist: lending is a sober business
    punctuated by odd moments of lunacy (The dark
    side of debt, 2006)



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    Rheinhart-Rogoff
    The “this time is different syndrome”

   This syndrome is rooted into the belief that
    financial crises are things that happen to other
    people in other countries and at other times.
   Crises do not happen to us, here and now
   We are doing things better, we are smarter, we
    have learned from past mistakes
      The old rules of valuation do not longer apply

      Financial innovation led to a better assessment

       and distribution of risks
      The current boom is based on sound

       fundamentals
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    When did the crisis begin?


   The end of the US housing bubble (summer 2006)
    and defaults in the subprime mortgage market
   Bear Stearns difficulties in Spring and Autumn
    2007
   Liquidity crunch August 2007 (the “Black Swan”)
   Lehman bankruptcy October 2008
   European sovereign risk (Greece, 2010)
   Contagion to big European countries (Summer
    2011)


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The crisis was initially underestimated
The Imf estimates of banks’ losses




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         The costs of the financial crisis


   Losses for the banks
   Wealth transfer from the taxpayer to the banks as a
    consequence of bailouts
   Loss of output
      Immediate (world: $ 4tn; UK £ 140 bn)

      Permanent (between 60 and 200 tn for the world economy

        and £ 1.8 and 7.4 for the UK)
   As Nobel-prize winning physicist Richard Feynman
    observed, to call these numbers “astronomical” would be
    to do astronomy a disservice: there are only hundreds of
    billions of stars in the galaxy. “Economical” might be a
    better description.                                      15
The effect on global growth




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Size of financial system support measures




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The Imf dashboard on intdebteness and
leverage in selected countries (Sep11)




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Contagion in Euroland: 2010-2012




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    Takeaways: a first conclusion that raises
    many questions

   The biggest financial crisis ever
   It came after a period of great financial innovation
   According to the conventional wisdom (and most
    regulators) the international financial system was
    reasonably robust and resilient
   The financial crisis is far from being resolved
   Why it happened?
   What will be the long-term consequences?
   We need to get back to the fundamental question:
    what is the role of a financial system? What are
    the functions it performs?
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