The Squam Lake Report: Fixing the Financial System

16 Pages Posted: 4 Oct 2010

See all articles by Kenneth R. French

Kenneth R. French

Dartmouth College - Tuck School of Business; National Bureau of Economic Research (NBER)

Martin Neil Baily

Institute for International Economics; University of Maryland

John Y. Campbell

Harvard University - Department of Economics; National Bureau of Economic Research (NBER)

John H. Cochrane

Hoover Institution; National Bureau of Economic Research (NBER); University of Chicago - Booth School of Business

Douglas W. Diamond

University of Chicago - Booth School of Business; National Bureau of Economic Research (NBER)

Darrell Duffie

Stanford University - Graduate School of Business; National Bureau of Economic Research (NBER)

Anil K. Kashyap

University of Chicago, Booth School of Business; National Bureau of Economic Research (NBER); Federal Reserve Bank of Chicago

Frederic S. Mishkin

Columbia Business School - Finance and Economics; National Bureau of Economic Research (NBER)

Raghuram G. Rajan

University of Chicago - Booth School of Business; International Monetary Fund (IMF); National Bureau of Economic Research (NBER)

David S. Scharfstein

Harvard Business School - Finance Unit; National Bureau of Economic Research (NBER)

Robert J. Shiller

Yale University - Cowles Foundation; National Bureau of Economic Research (NBER); Yale University - International Center for Finance

Hyun Song Shin

Bank for International Settlements (BIS)

Matthew J. Slaughter

Dartmouth College - Tuck School of Business; National Bureau of Economic Research (NBER)

Jeremy C. Stein

Harvard University - Department of Economics; National Bureau of Economic Research (NBER)

René M. Stulz

Ohio State University (OSU) - Department of Finance; National Bureau of Economic Research (NBER); European Corporate Governance Institute (ECGI)

Abstract

In these excerpts from The Squam Lake Report, fifteen distinguished economists analyze where the global financial system failed, and how such failures might be prevented (or at least their damage better contained) in the future. Although there were many contributing factors to the crisis — including “agency” problems throughout the financial system and a bankruptcy code poorly suited for reorganizing financial firms — at the core of the problem is a potential conflict between the risk-taking proclivity of financial institutions and the interests of the economy at large that must be managed at least in part through more effective regulation. The Squam Lake Report provides a nonpartisan plan to transform the regulation of financial markets in ways designed to limit systemic risk while preserving — to the extent possible and prudent — the economies of scale and scope that justify the existence of today's large financial institutions.

To reduce the risks that large banks will fail, the authors call for higher capital requirements based on more effective assessments of the risks of bank assets and liabilities, as well as a new systemic regulator that should be part of the central bank. To reduce the costs of failure when it occurs, the authors propose that banks be required to create “living wills” laying out their plan to sell assets or shut down operations in the event of financial trouble. As part of that plan, regulators are urged to “aggressively encourage” banks to issue “contingent” debt capital securities that convert into equity.

Suggested Citation

French, Kenneth R. and Baily, Martin Neil and Campbell, John Y. and Cochrane, John H. and Diamond, Douglas W. and Duffie, James Darrell and Kashyap, Anil K. and Mishkin, Frederic S. and Rajan, Raghuram G. and Scharfstein, David S. and Shiller, Robert J. and Shin, Hyun Song and Slaughter, Matthew J. and Stein, Jeremy C. and Stulz, Rene M., The Squam Lake Report: Fixing the Financial System. Journal of Applied Corporate Finance, Vol. 22, Issue 3, pp. 8-21, Summer 2010. Available at SSRN: https://ssrn.com/abstract=1684891 or http://dx.doi.org/10.1111/j.1745-6622.2010.00284.x

Kenneth R. French (Contact Author)

Dartmouth College - Tuck School of Business ( email )

Hanover, NH 03755
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Martin Neil Baily

Institute for International Economics ( email )

1750 Massachusetts Avenue, NW
Washington, DC 20036-1903
United States

University of Maryland

College Park
College Park, MD 20742
United States

John Y. Campbell

Harvard University - Department of Economics ( email )

Littauer Center
Room 213
Cambridge, MA 02138
United States
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617-495-7730 (Fax)

HOME PAGE: http://scholar.harvard.edu/campbell

National Bureau of Economic Research (NBER)

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John H. Cochrane

Hoover Institution ( email )

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United States
6507236708 (Phone)

HOME PAGE: http://faculty.chicagobooth.edu/john.cochrane/index.htm

National Bureau of Economic Research (NBER)

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University of Chicago - Booth School of Business ( email )

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HOME PAGE: http://faculty.chicagobooth.edu/john.cochrane/research/Papers/

Douglas W. Diamond

University of Chicago - Booth School of Business ( email )

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HOME PAGE: http://faculty.chicagobooth.edu/douglas.diamond/

National Bureau of Economic Research (NBER)

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James Darrell Duffie

Stanford University - Graduate School of Business ( email )

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National Bureau of Economic Research (NBER)

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Anil K. Kashyap

University of Chicago, Booth School of Business ( email )

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National Bureau of Economic Research (NBER) ( email )

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Federal Reserve Bank of Chicago ( email )

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Frederic S. Mishkin

Columbia Business School - Finance and Economics ( email )

3022 Broadway
New York, NY 10027
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
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Raghuram G. Rajan

University of Chicago - Booth School of Business ( email )

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Chicago, IL 60637
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773-702-0458 (Fax)

International Monetary Fund (IMF) ( email )

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National Bureau of Economic Research (NBER)

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David S. Scharfstein

Harvard Business School - Finance Unit ( email )

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United States
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HOME PAGE: http://www.people.hbs.edu/dscharfstein/

National Bureau of Economic Research (NBER)

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Robert J. Shiller

Yale University - Cowles Foundation ( email )

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HOME PAGE: http://www.econ.yale.edu/~shiller/

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Yale University - International Center for Finance ( email )

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203-432-6167 (Fax)

Hyun Song Shin

Bank for International Settlements (BIS) ( email )

Centralbahnplatz 2
Basel, Basel-Stadt 4002
Switzerland

HOME PAGE: http://www.bis.org/author/hyun_song_shin.htm

Matthew J. Slaughter

Dartmouth College - Tuck School of Business ( email )

Hanover, NH 03755
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Jeremy C. Stein

Harvard University - Department of Economics ( email )

Littauer Center
Cambridge, MA 02138
United States
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617-496-7352 (Fax)

HOME PAGE: http://post.economics.harvard.edu/faculty/stein/stein.html

National Bureau of Economic Research (NBER)

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Rene M. Stulz

Ohio State University (OSU) - Department of Finance ( email )

2100 Neil Avenue
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United States

HOME PAGE: http://www.cob.ohio-state.edu/fin/faculty/stulz

National Bureau of Economic Research (NBER)

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United States

European Corporate Governance Institute (ECGI)

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

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