The Financial and Economic Crises

The Financial and Economic Crises

An International Perspective

Edited by Benton E. Gup

The 2007 financial and economic crisis that began in the United States and quickly spread around the world differed from earlier crises in a number of significant ways. This book examines the causes of these events in the US, and their impacts on North America, Europe, Asia and Australia.

Chapter 10: The Global Financial Crises: Back to Basics, Bank Supervision in Developing Countries

Thomas Lutton and Joseph Cauthen

Subjects: business and management, corporate governance, economics and finance, corporate governance, financial economics and regulation, international economics


* Thomas Lutton and Joseph Cauthen 1 INTRODUCTION The global financial crisis (GFC) established an incontrovertible fact. Regulators in developed countries with access to the latest technology and management information systems were caught by surprise. As a group, regulators failed to anticipate the onset and scope of the GFC of 2008 and 2009. Despite a variety of sophisticated on- and off-site early warning and risk assessment systems, manned by thousands of examiners adhering to a supervision by risk (SBR) examination process, risks went undetected until they ultimately materialized as losses. Many depository and nondepository financial institutions took what turned out to be extremely risky positions. They became dangerously illiquid if not insolvent under the not-so-watchful eye of regulators and rating agencies who were supposed to be monitoring risk. Risk-based pricing, risk-based supervision, risk-based assets, and risk management overall took a convincing hit in the eyes of financial regulators in less-developed economies. Although the fundamental causes of the GFC will be the focus of research studies for many years, bank supervisors and regulators in developing countries do not have the luxury of time to address what appears to be a fundamental question. If the ‘more advanced’ safety and soundness monitoring processes proved so deficient in developed economies, what risk assessment and monitoring processes should they pursue? To place this question in context, many central banks have been struggling to implement Basel II economic capital measures. They have had difficulty in estimating the parameters of unconditional loss distributions for market, credit, and operational...

You are not authenticated to view the full text of this chapter or article.

Elgaronline requires a subscription or purchase to access the full text of books or journals. Please login through your library system or with your personal username and password on the homepage.

Non-subscribers can freely search the site, view abstracts/ extracts and download selected front matter and introductory chapters for personal use.

Your library may not have purchased all subject areas. If you are authenticated and think you should have access to this title, please contact your librarian.

Further information