Research Handbook on International Banking and Governance
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Research Handbook on International Banking and Governance

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Edited by James R. Barth, Chen Lin and Clas Wihlborg

The contributors – top international scholars from finance, law and business – explore the role of governance, both internal and external, in explaining risk-taking and other aspects of the behavior of financial institutions. Additionally, they discuss market and policy features affecting objectives and quality of governance. The chapters provide in-depth analysis of factors such as: ownership, efficiency and stability; market discipline; compensation and performance; social responsibility; and governance in non-bank financial institutions. Only through this kind of rigorous examination can one hope to implement the financial reforms necessary and sufficient to reduce the likelihood and severity of future crises.
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Chapter 6: Lessons Learned from Recent Financial Crises

Benton E. Gup

Extract

6 Lessons learned from recent financial crises Benton E. Gup 6.1 FORESIGHT FROM THE 1980S S&L CRISIS William Seidman, former Chairman of both the Federal Deposit Insurance Corporation (FDIC) and the Resolution Trust Corporation (RTC), wrote a chapter in History of the Eighties: Lessons for the Future that was published by the FDIC in 1997.1 More than 1600 banks failed during the 1980–1993 period that is associated with the savings and loan (S&L) crisis. He said that: ‘The critical catalyst causing the institutional disruption around the world can be almost uniformly described by three words: real estate loans.’ Most of the failures were attributed to construction and development (C&D) loans associated with commercial real estate.2 Seidman went on to say that: ‘the biggest danger for financial institutions is lending based on excessive optimism generated about certain kinds of lending that are the fashion of the day’. Ten years after History of the Eighties was published, the United States experienced the worst financial and economic crisis since the Great Depression of the 1930s. Seidman’s insights about ‘real estate loans’ and ‘excessive optimism’ were on target in explaining the economic and financial crisis that began in the United States in 2007. The US crisis also affected other countries. This chapter asks what lessons we can learn from the crises in the US and other countries about real estate lending. To answer that question, the chapter is divided into three main sections. Section 6.2 examines four key factors that...

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