Preparing for the Next Financial Crisis

CONTENTS

Preface xiii

Introduction 1

1 Notions 4

1.1 Financial stability 4

1.2 Financial fragility, liquidity, and leverage 6

1.2.1 Denitions 6

1.2.2 Theoretical underpinnings 7

1.2.1.1 The Diamond and Dybvig model 8

1.2.1.2 Subsequent developments 10

1.3 Safe assets 12

1.4 Bubbles and contagion 14

1.4.1 What is a bubble? 14

1.4.2 Contagion or nancial integration? 16

1.5 Moral hazard and too big to fail 17

1.5.1 Moral hazard and time consistency 18

1.5.1.1 Origin of moral hazard 18

1.5.1.2 Consequences of moral hazard for nancial stability 19

1.5.2 Concentration of the nancial industry and TBTF 19

1.5.2.1 Financial concentration 19

1.5.2.2 TBTF 20

1.6 Systemic risk 21

1.6.1 Denition of systemic risk 21

1.6.2 Sources of system