Practical analysis for investment professionals
09 May 2012

Search for Stability: Regulation, Reform, and the Role of Monetary Policy

Randall Kroszner, a professor at the University of Chicago Booth School of Business and a former governor of the U.S. Federal Reserve Bank, discussed the fragility of the banking system and the role of monetary policy during fiscal crises at the 65th CFA Institute Annual Conference in Chicago yesterday. Kroszner joked at the start of his session that the U.S. credit crisis was “his fault,” since he served as a Fed governor from 2006 to 2009. Fortunately for the audience, Kroszner’s current occupation allowed him to speak off script — a luxury he did not have during his tenure at the U.S. central bank.

Kroszner opened his discussion by noting that leverage, liquidity, and interconnectedness make the banking system extraordinarily fragile as compared to other industries. The banking model is to borrow short and lend long, which creates a funding mismatch, and banks rely enormously on short-term financing, which can change very quickly. In addition, he pointed out, any nonfinancial institution with a leverage ratio of 10:1 is far too overleveraged. But a bank with the same leverage is extremely well capitalized. The problem was that just ahead of the crisis, many banks only had 3–4% core capital, and that left very little room for asset volatility.

Read more on the Annual Conference blog →

About the Author(s)
Rob Gowen, CFA

Robert Gowen, CFA, was Head of Product Solutions at CFA Institute, where he oversaw a team of content directors that contribute daily. Prior to joining CFA Institute, he worked in the institutional investment industry for BB&T and Fidelity Investments. Gowen earned a BA in economics from Washington University in St. Louis and an MBA from the Darden School at the University of Virginia.

Leave a Reply

Your email address will not be published. Required fields are marked *

By continuing to use the site, you agree to the use of cookies. more information

The cookie settings on this website are set to "allow cookies" to give you the best browsing experience possible. If you continue to use this website without changing your cookie settings or you click "Accept" below then you are consenting to this.