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Dr Vincenzo Bavoso is a researcher in the Department of Law at Durham University on Work Package 2: Financial Crisis in the Banking Sector of the Tipping Points project. He is looking at the role of law and legal institutions in preventing financial crises and limiting systemic risk in financial markets. In this interview he talks about his research in financial scandals and how regulation can help make financial markets accountable to democratic societies.

In your research what financial scandals did you investigate?

When I examined financial scandals for the purpose of my research I focused on the accounting scandal age from 2001-03, along with Northern Rock and Lehman Brothers in the context of the recent global financial crisis. Financial scandals are caused, among other things, by mismanagement, and lack of understanding of certain processes. All of this is based on certain failures of regulation. You would expect there would be supervision in place and in all of these examples of large organisations with lax or flawed managerial processes, it was not.

Do you think these scandals mainly exist due to a failure of regulation or do you think something within the financial system allows some of these events to occur?

During a period of financial boom, such as the 1980s, the economist Hyman Minsky came up with a theory of financial instability. He thought the larger a financial system develops the more it will be prone to instability then eventually to crisis or a situation of default, which is something we experienced before the explosion of the global financial crisis. After that ‘tipping point’ if you will between 2006 and 2007 it went from boom to bust. The problem is that when you’re in a period of boom nobody seems capable of recognising what the limits of the system are. Nobody seems to be able to see that the system is not resilient or if an individual or institution does raise red flags they are not heeded. Read the rest of this entry »

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For those of you who may not have come across the latest Tipping Points Annual Report yet, it provides the latest updates from the project. Tipping Points is now entering its fourth year of interdisciplinary research in climate change, the global financial crisis, mathematical tipping points and the tipping point metaphor itself.

Since the project started in summer 2010 it has questioned the fundamental understanding of tipping points in nature and society and has thus far produced a large body of work, with more publications to be uploaded to its website in the near future. This report includes field updates from paleoclimate research in the Arctic, historical bank failures in Britain, health tipping points and the agency of language.

Tipping Points Annual Report 2012-13

Professor Ranald Michie tells the story of banking in Britain within the context of the Global Financial Crisis, starting with the failure of Northern Rock and other highly interconnected banks in the UK.

In September 2007 rumours began to circulate in Britain that the Newcastle-based bank Northern Rock was in financial difficulty. As these rumours gained in credibility, retail depositors rushed to withdraw their savings fearing that they would be lost if the bank collapsed. What these depositors were doing in public, as they formed queues outside the bank’s branches, had already happened behind the scenes throughout August. In the wake of the sub-prime lending crisis in the US, banks had become weary of lending to fellow banks in case they would not be able to repay them. That created problems for banks like Northern Rock as it had adopted a business model that made it dependent upon short-term borrowing from other banks to finance its aggressive expansion of long-term mortgage lending. As new funds provided by other banks dried up and the date on which many existing loans had to be repaid, Northern Rock had no alternative but to seek assistance from the Bank of England, the traditional lender of last resort under these circumstances.

northern rock bank run 2

The ‘run’ on Northern Rock

It was while the required assistance was being negotiated, involving a protracted delay because responsibility no longer lay with the Bank of England alone but was shared with the FSA and the Treasury, that the story broke that Northern Rock was in difficulty. Faced with panic among the depositors, and the possible spread of their actions to all British banks, the UK government was forced to intervene and guarantee bank deposits. In many ways Northern Rock was unfortunate as the timing of its borrowings from other banks put it first in line to require assistance when these funds dried up. It could equally well have been any of the other ex-building societies and even a number of those that had not de-mutualised, as they were all operating the same business model.

If the crisis had ended with the collapse of Northern Rock, and its belated nationalisation early in 2008, then it would forever have been associated with that single bank and its cause blamed on poor management. Even if the crisis had stopped with the disappearance of all those building societies that had converted into banks, as did happen, then the story would be about a failed experiment and attributed to the transformation of the British financial system begun by Mrs Thatcher’s Conservative government in the 1980s. However, even in Britain the crisis went much further than a set of specialist mortgage lenders, as these were not too big or interconnected to fail as none played a major role in the provision of short-term credit or were central to the operation of the payments system. With hindsight the need for the government to intervene might have been subject to serious questioning along with the scare tactics used by the media in pursuit of a scoop. Instead, the near collapse of the two largest Scottish banks, Royal Bank of Scotland (RBS) and HBOS, and the massive intervention required by the government to save them, is what really brought the crisis to a head in Britain. Read the rest of this entry »

BSF purple Newcastle aw

IHRR’s Tipping Points project will be at the 2013 British Science Festival in Newcastle with the event Tipping Points in Nature and Society on Wednesday, 11 September.  You can now book this event on the British Science Festival’s website.  We have put together a fascinating group of presentations for the festival and plan to have some exciting discussions about critical thresholds that affect nature and society.  How does a bank network collapse?  How can we better understand present and future climate change?  How do terms like ‘tipping point’ spread? Do they have meaning or are they simply meaningless buzz words?  These plus a series of other related questions will be explored at Tipping Points in Nature and Society.

Presentations

Critical Transitions in Climate

What can studying the climate of the distant past tell us about our present climate? Rapid changes in climate have occurred in the past, long before direct measurements were made, but are these ‘tipping points’ in the climate system? Does irreversible change happen? Climate scientists Professor Antony Long, Dr Eleanor Maddison and Dr Sarah Woodroffe will help shed some light on the mystery of abrupt environmental change by introducing how studying past climate change can help us understand what changes may be in store for our planet in the future. Read the rest of this entry »

The new annual report from the Tipping Points project is now available.

It features the latest research updates from all five work packages of the project:

  • Trust and maintaining resilience of financial markets
  • Development of UK banking sector
  • Field research on past climate in the North Atlantic
  • Tipping points in populations of UK banks and ‘titanic moments’
  • Use of ‘tipping point’ in popular culture and in discussions about climate change

Plus much more!

Tipping Points Annual Report 2011-12 

In one of the final presentations given at the Tipping Points Annual Conference, Prof Ranald Michie presents the history of London as a global financial centre before and after the 2007-08 banking crisis and subsequent euro debt crisis.  Prof Michie explains how London became the global financial centre it is today. Read more

A new report from IHRR’s Tipping Points project on the role of trust in financial markets is now available.

It includes video interviews (also below) with two researchers in financial law from the project, Prof Roman Tomasic and Dr Folarin Akinbami, about how we can learn from the banking crisis and what both financial institutions and regulators can do to help build resilience in financial markets through trust.  The role of trust in financial markets is crucial to the stability of the global financial system.  Mistrust leads to problems like ‘moral hazard‘ for example which is one of a number of factors that led to the banking crisis and is also of large importance to the debt crisis in Europe and the US.  Tipping Points researchers advocate for a broader ‘principles-based’ approach to financial regulation based on ethics that if adopted could help make markets more resilient and prevent financial institutions, including banks, from dodging rules in place in order to make short-term profits that can inadvertently increase their vulnerability and lead to failure. Read the rest of this entry »

The first annual report from IHRR’s Tipping Points project is now available.  It gives an overview of the project’s progress so far along with its aims and goals for the future.

In its first year the project has shown that there is clearly much more to tipping point than simply being a popular ‘buzz word’ and that it may actually describe something quite profound about the physical and social world we live in.

Tipping Points Annual Report 2010-2011

The screening of Inside Job in Durham, UK hosted by Tipping Points was a success for a number of reasons.  First, it should be stated that this film has had a fairly limited world release, so having it in a small town like Durham in an 84-seat capacity cinema, it’s no surprise that it generated such a large interest within the Durham community and the North East.  Living during the end/aftermath of a financial crisis has been difficult for some, but extremely difficult for many (mostly poor) people living in the world today.  What the film Inside Job reveals is that many of the people who governments and the public depend on to regulate financial services, banking, capital etc. are the very ones that turned their backs on everyone, not to mention themselves.

Since the film delivers an articulate portrayal of the events before and after the banking crisis of 2008, it gives much to talk about.  Could regulation in the US, for example, have prevented the banking crisis from taking place?  Was it merely the result of poor legislation or in some cases no legislation at all for governing banks in the US?  Producers of Inside Job argue clearly and concisely that regulation of banks in the US has been declining at least since the Reagan administration.  Another important point made by the film is the issue of criminality.  No one went to prison for causing the financial crisis.  Those involved in creating and then ‘riding’ the debt bubble in the US till it burst were never incriminated for their acts, although there is some rather comical footage of many well-known bankers on Wall Street being interrogated by members of US congress.  The rhetorical strengths of the film help turn the US financial system inside-out.

Read more

IHRR has organised a film screening with the Gala Cinema/Theater in Durham of the film Inside Job, a documentary that investigates the cause of the 2008 banking crisis in the US.  Following the event there will be a debate/discussion about the banking crisis that will include researchers from the Tipping Points project such as Prof Ranald Michie, Paul Ormerod, Dr Folarin Akinbami, Dr Alex Bentley and other researchers from the project.

For those of you who live in Durham or Northeast England, the film starts at 8pm at the Gala in Durham and it is still possible to book tickets for this event.

The screening has received some attention from the press and will likely be an exciting event for both the public and researchers in the Tipping Points project.

‘High-profile discussion of how we ran into trouble’. The Journal

Hazard Risk Resilience Magazine Issue 2 Out Now!

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