Lessons from the financial crisis: how much longer

until the end of the crisis?

Xavier VivesIESE Business School

June 2013

VIX: Fear index(Jun. 19 2013)

Fuente: Yahoo Finance.

2008 Lehman Brothers

failure

2010 -SovereignDebt Crisis

Financial crisis

Proportion of countries with banking crises: 1900-2008

Weighted by their share of world income

World War I

The Panic of 1907

The Great Depression

The First Global Financial Crisisof 21st Century

Emerging Markets, Japan, the Nordic Countries, and US (S&L)

Perc

ent o

f cou

ntrie

s

Source: Figure 1 in Reinhart & Rogoff (2008), “Banking Crises, An Equal Opportunity Menace”, NBER WP 14587.

Will we ever learn?

Context of the crisis

Is the current crisis similar or not to past crises?

Bank panic in October 1907

Bank panic in October 2007

The saviors

J.P. Morgan

Summary diagnose

Regulatory failure and the crisis

Source: Adrian-Shin (2010)

The weight of historyCapital ratios for UK and US banks

Source: Banking of the State, Bank of England, Nov 2009. (FT Lex, Jan 23, 2010)

Source: Adrian-Shin (2010)

Managing liquidity orcontrolling solvency?

• Great Depression– Lack of attention to liquidity (Friedman and

Schwartz)• Great Recession

– Lack of attention to solvency?• European banking problems are liquidity problems• Draghi’s put and the euro fragility as a self-fulfilling

crisis– Why are banks not lending?

Principles for financial reform

The future of the euroor how long Draghi’s magic will work

VIX(Jun. 19 2013)

Fuente: Yahoo Finance.

2012 JulyDraghi

«ECB Will Do What’s Needed toPreserve Euro»

2008 Lehman Brothers

failure

2010Greece Bailout

2011 MayECB bails

out Portugal

2011 Greek default

probability increases

2012 Greeks vote in a general

election rejecting the country's bailout

agreement with the EU and IMF

Banking union

Spain

‐105‐95‐95

‐86‐62‐62‐61

‐35‐26

‐11‐8

912

3137

66127

‐150 ‐100 ‐50 0 50 100 150

PortugalSpain

GreeceIreland

SlovakiaEstoniaCyprus

SloveniaItaly

FranceAustriaMalta*Finland

NetherlandsGermanyBelgium

Luxembourg

Net foreign position relative to GDPEnd of June 2011

*End of December 2010.Source: Eurostat, Ifo Institute calculations.

% of GDP in 2011