Notes from the Vault
- The financial crisis of 2008 is a clear example of systemic risk becoming real and affecting financial markets.
- Differences in the regulatory environment from country to country appear to explain some but not all of the differences in how the crisis affected different countries.
- Financial regulation that considers the international dimensions of financial markets and institutions is both desirable and feasible.
- Two specific regulatory proposals to reduce the frequency and severity of financial crises are contingent capital—funds that convert to capital in bad times—and regulation of systemic risk by bank examiners.
- Financial economists and practitioners generally have a positive view of short selling, a view on evidence at CenFIS's conference on short selling.
- The ban on short sales in some firms did not increase trading in options, an effect that might have been expected.
- Short sales might be made more efficient by a centralized listing of stock that can be borrowed and sold short.
- Policy changes that are quick responses to financial difficulties can create uncertainty about future policies.
- Banks are holding substantially more excess reserves than in August 2008.
- The Federal Reserve began paying interest on reserves in October 2008 and currently is paying an interest rate on reserves similar to rates on short-term Treasury securities.
- Payment of interest on reserves accounts for much, though probably not all, of the increase in excess reserves.
- Stock prices fell roughly 50 percent from peak to trough from October 2007 to March 2009.
- These drops in stock prices are large relative to those associated with earlier recessions since World War II.
- This extraordinary plunge in stock prices may reflect effects of the financial crisis rather than lower earnings from an especially severe recession.
- Credit ratings are not complete summaries of securities' riskiness.
- Structured securities change securities' cash flows and riskiness in nonobvious ways.
- The old-fashioned advice "If you don't understand it, don't buy it" seems to apply quite well here.