The Hypocrisy of the Deposit Insurance

The U.S is going through a banking crisis and pulling the rest of the world with her. Almost all of the emerging markets have gone through similar banking crises in the last 15 years. Each case differs on some dimensions, except for the important role played by the deposit insurance that lead to moral hazard. A structurally unsound banking system combined with implicit government bailouts lead to excessive risk taking. This has been emphasized numerous times by academics, politicians and the IMF. The cure for these unhealthy economies—as goes the advice from the IMF and other doctors in the developed world—lies in breaking this cycle. This, they claim, should be achieved by extensive structural banking reforms, where deposit insurance must be reduced sharply.

The Mystery of Capital Flows

Economists, or at least this one, spend quite a lot of time in trying to understand what drives capital flows and what impact they have on growth and welfare. I started writing this column last Friday but then had to hunker down,” as Texans say, for hurricane Ike. We lost power along with lots of […]

How integrated are European financial markets? And what’s trust got to do with it?

Europe’s capital markets are far from integrated. Here is some very innovative research that combines financial integration measures with ‘social capital’. It turns out that the market fragmentation stems in a large part from a lack of trust and confidence in certain regions and nations – things that the EU cannot directly affect. Financial market […]