(p. vii) Preface
(p. vii) Preface
When we commenced this project at the start of 2007, banks around the world were posting record profits and major risks appeared to have abated. The general macroeconomic environment embodied in rising stock markets and buoyant economic growth provided the bedrock for the strong performance we observed at that time.
Since then things have changed completely! During the first half of 2007, following increases in interest rates, the rate of US subprime mortgage delinquencies increased, prices of mortgage-backed securities were reduced, and the cost of insuring these securities against default increased. The turmoil that then hit the global financial system has been unprecedented. There have been widespread government bank bailouts, recapitalization plans, liquidity injections, and credit guarantee schemes affecting many countries. The cost of all this activity has been enormous. In April 2009, the IMF stated that US financial institutions were likely to incur $2.7 trillion of losses from the global crisis, part of a worldwide total expected to top $4 trillion. Global banking sector instability and gridlock in many other financial markets have raised profound concerns about the stability of the financial system and the business models used by banks within the system.
As we completed the handbook in early 2009, banking systems in many countries (particularly in the US, UK, Germany, Spain, Ireland, Iceland, and throughout central and eastern Europe) remained in a state of crisis, threatening capacity to perform effective intermediation functions for many years to come. Government intervention in banking continues via the purchases of impaired assets, recapitalizations of troubled banks, and injections of liquidity into the system. Academics and policymakers continue to debate proposals to fix the financial system. Reforms that have been or are likely to be adopted in the coming months include: extending the coverage of bank regulation; increasing capital requirements; designing countercyclical capital requirements; enhancing regulation and supervision of bank liquidity; enhanced supervision of credit rating agencies; codes covering executive pay and benefits; improving arrangements for regulation of the activities of cross-border banks; and a shift in focus from micro- to macro-prudential supervision. If lessons are learned from the ongoing financial crisis, there is little doubt that the banking industry which emerges in the years to come will be very different from the one we observed at the beginning of 2007.
This handbook provides the reader with a comprehensive overview and analysis of banking. The authors of the following 36 chapters comprise a collection of (p. viii) leading academics and policymakers in the field. These authors emanate from universities in the United States, Europe, South America, and Asia; the US Federal Reserve System; the Office of the Comptroller of Currency; the European Central Bank; the Bank of Thailand; the World Bank; the International Monetary Fund; and the World Trade Organization. The book strikes a balance among abstract theory, empirical research, practitioner analysis, and policy-related material. Different chapters in the handbook have different emphases on these four ingredients. We hope that the contributions contained in this handbook set the stage for future research and policy debate for many years to come.