Write an essay with the title: “Systemic Instability of the Banking Sector: Causes and Cures”, in which you pay careful attention to at least the following aspects:
• When a bank is (in)solvent as opposed to when it is (il)liquid.
• The degree to which an individual commercial bank is susceptible to shortages of liquidity and capital, and the degree to which the commercial banking sector as a whole is susceptible to such shortages.
• The degree to which non-bank financial institutions (individual or aggregate) are susceptible to shortages of liquidity and capital.
• The role of leveraging as a source of risk for banks and non-bank financial institutions.
• The moral hazard inherent in the central bank’s accommodation facility for all banks and its lender-of-last-resort (LOLR) facility for banks which are “too big to fail” in particular.
• Those elements of the subprime financial crisis which caused instability in the banking system.
• Why banking crises force banks to deleverage and why deleveraging negatively affects the real economy
• Why economies tend to suffer a “debt overhang” after a crisis, meaning that the economy continues to function sub-optimally for a considerably period after the crisis has been substantially resolved.
• The two types of externalities that pose the risk of contagion for the financial sector: 1. common exposure and 2. pro-cyclicality.
• The difference between micro- and macroprudential regulation and the various types of macro-prudential regulation as suggested by the lessons learnt from the subprime crisis.
Which types of macro-prudential regulation show the most promise in containing banking instability?
o Which sections of the prescribed work for this learning unit did you find the most interesting?
o Which sections did you find boring or not challenging enough?
o Which sections did you find too challenging?
o Did the assignment add value to the application of your knowledge and skills in the workplace (if you are employed)?
o What aspects of the module, study material and the learning experience would you like to change? Any remarks and suggestions are welcome.