Governments have attempted to eliminate or mitigate financial crises by
regulating the financial sector. One major goal of regulation is
transparency: making institutions' financial situations publicly known
by requiring regular reporting under standardized accounting procedures.
Another goal of regulation is making sure institutions have sufficient
assets to meet their contractual obligations, through reserve
requirements, capital requirements, and other limits on leverage.
Some
financial crises have been blamed on insufficient regulation, and have
led to changes in regulation in order to avoid a repeat. For example,
the former Managing Director of the International Monetary Fund,
Dominique Strauss-Kahn, has blamed the financial crisis of 2008 on
'regulatory failure to guard against excessive risk-taking in the
financial system, especially in the US'.[26] Likewise, the New York
Times singled out the deregulation of credit default swaps as a cause of
the crisis.[27]
However, excessive regulation has also been cited as
a possible cause of financial crises. In particular, the Basel II
Accord has been criticized for requiring banks to increase their capital
when risks rise, which might cause them to decrease lending precisely
when capital is scarce, potentially aggravating a financial crisis.[28]
International
regulatory convergence has been interpreted in terms of regulatory
herding, deepening market herding (discussed above) and so increasing
systemic risk.[29] From this perspective, maintaining diverse regulatory
regimes would be a safeguard.
Fraud has played a role in the
collapse of some financial institutions, when companies have attracted
depositors with misleading claims about their investment strategies, or
have embezzled the resulting income. Examples include Charles Ponzi's
scam in early 20th century Boston, the collapse of the MMM investment
fund in Russia in 1994, the scams that led to the Albanian Lottery
Uprising of 1997, and the collapse of Madoff Investment Securities in
2008.
Many rogue traders that have caused large losses at financial
institutions have been accused of acting fraudulently in order to hide
their trades. Fraud in mortgage financing has also been cited as one
possible cause of the 2008 subprime mortgage crisis; government
officials stated on September 23, 2008 that the FBI was looking into
possible fraud by mortgage financing companies Fannie Mae and Freddie
Mac, Lehman Brothers, and insurer American International Group.[30]
Likewise it has been argued that many financial companies failed in the
recent crisis because their managers failed to carry out their fiduciary
duties.
Another factor believed to contribute to financial
crises is asset-liability mismatch, a situation in which the risks
associated with an institution's debts and assets are not appropriately
aligned. For example, commercial banks offer deposit accounts which can
be withdrawn at any time and they use the proceeds to make long-term
loans to businesses and homeowners. The mismatch between the banks'
short-term liabilities (its deposits) and its long-term assets (its
loans) is seen as one of the reasons bank runs occur (when depositors
panic and decide to withdraw their funds more quickly than the bank can
get back the proceeds of its loans).[17] Likewise, Bear Stearns failed
in 2007--08 because it was unable to renew the short-term debt it used
to finance long-term investments in mortgage securities.
In an
international context, many emerging market governments are unable to
sell bonds denominated in their own currencies, and therefore sell bonds
denominated in US dollars instead. This generates a mismatch between
the currency denomination of their liabilities (their bonds) and their
assets (their local tax revenues), so that they run a risk of sovereign
default due to fluctuations in exchange rates.
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