The Real Lessons of the Global Banking Crisis

Abstract

This article examines the causes of the Global Banking Crisis (GBC) and finds a number of important issues that still need to be addressed, some of which have not been discussed in the previous major studies of the GBC. We offer solutions for dealing with these issues. These include: a proper definition of risk that clearly differentiates between idiosyncratic, systematic and systemic risks; proper measurement of risk; better corporate governance of risk appetite and risk profile in individual banks; better risk management capabilities within the banking system and a greater understanding of risk management by the regulator; a proper definition of capital, i.e., economic rather than regulatory capital, and a proper assessment of economic capital adequacy; and simpler products!

Keywords: Global Banking Crisis

JEL Classification: G01, G21