In 2010, according to the European Commission’s latest forecasts, the UK government will be spending 52.4 per cent of gross domestic product and receiving just 38.7 per cent of GDP in revenue. It will, as a result, have a gigantic general government deficit of 13.8 per cent of GDP. Worse, the UK’s cyclically-adjusted deficit will be 12.2 per cent of GDP. These are numbers one would expect in a time of war.
Did inflation targeting fail? Central banks have mostly escaped blame for the crisis. Do they deserve to do so?
Just over five years ago, Ben Bernanke, now chairman of the Federal Reserve, gave a speech on the “Great Moderation” – the declining volatility of inflation and output over the previous two decades. In this he emphasised the beneficial role of improved monetary policy. Central bankers felt proud of themselves. Pride went before a fall. Today, they are struggling with the deepest recession since the 1930s, a banking system on government life-support and the danger of deflation. How can it have gone so wrong?
By Lucian Bebchuk
Should banks with large amounts of troubled assets be allowed to participate as managers or investors in funds set up under the US’s public-private investment programme? The way the scheme is currently designed not only permits such banks to take part, but encourages them to do so.
By Michael Pomerleano and Ying Lin
Until recently, the international financial community was focused on the financial crisis in the US, while the European and Asian banking communities indulged in a “schadenfreude” at the misfortune of the US after years of envying their financial innovations. However, the recent Global Financial Stability Report from the IMF points out that the banking crisis is global. Martin’s recent article reviews the data (Fixing bankrupt systems is just the beginning).
In this context, it is instructive to analyze the condition of the various banking system in the world, and get a sense for the capital shortfalls. We estimate that the largest banking systems in the Europe have $2,438bn in Tier 1 capital and a capital shortfall of $3,397bn; In East Asia, the largest banking systems have $1,189bn in Tier 1 capital and a shortfall of $758bn. The findings of this article are twofold. First, there is a global shortage of bank capital. Second, the largest share of bad assets belongs to European banks, and Europe has both the biggest capital shortfall and has made the least progress in restoring the banking system to health.
With Ying Lin’s invaluable assistance we analysed the banking data provided by Bankscope. There are three issues at least. The data is not as timely (it is from 2007) and not as comprehensive as one would expect. Second, due to differences in national regulatory regimes, as well as accounting and taxation, the data on capital, equity and non performing assets is not strictly comparable across countries. Third, not all the financial institutions report comprehensive data. Mostly state owned institutions do not report key variables such as assets, equity, non performing loans and reserves. Therefore, it took considerable effort to analyze the data. As a result the findings need to be interpreted with caution. Nevertheless the results are instructional.