How big banks fail and what to do about it

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how big banks fail and what to do about it

Darrell Duffie (Author of How Big Banks Fail and What to Do about It)

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Published 28.11.2018

Study Shows Too-Big-To-Fail U.S. Banks Grew After Crisis

Current regulatory approaches to mitigating bank failures do not adequately In How Big Banks Fail, I describe the failure mechanics of dealer.
Darrell Duffie

Darrell Duffie: How big banks fail and what to do about it

Financial Markets and Portfolio Management. Darrel Duffie, Dean Witter Distinguished Professor of Finance at the Graduate School of Business, Stanford University, is one of the leading scholars in financial economics and has written numerous brilliant research articles and books on financial markets and institutions. How big banks fail and what to do about it is no exception as it neatly explains the key underlying mechanisms that can cause large financial institutions to fail. The main theme of the book is that short-term repo funding, prime brokerage, and OTC derivatives are prone to runs similar to classic bank runs on demand deposits. Therefore, these contracts entail significant systemic risk, as became obvious during the financial crisis. As the title suggests, the book not only describes failure mechanisms, but concludes by proposing various revisions to regulation and

When they fail, as we saw in the global financial crisis, they pose significant risks to our financial system and the world economy. How Big Banks Fail and What.
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Too big to fail is a company that's so essential to the global economy that its failure would be catastrophic. Big doesn't refer to the size of the company. When the housing market collapsed, their investments threatened to bankrupt them. That's when they became too big to fail. Bear was a small bank but very well-known. The Fed worried that Bear's failure would destroy confidence in other banks. Lehman Brothers was an investment bank.

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Dealer banks--that is, large banks that deal in securities and derivatives, such as J. Morgan and Goldman Sachs--are of a size and complexity that sharply distinguish them from typical commercial banks. When they fail, as we saw in the global financial crisis, they pose significant risks to our financial system and the world economy. How Big Banks Fail and What to Do about It examines how these banks collapse and how we can prevent the need to bail them out. In sharp, clinical detail, Darrell Duffie walks readers step-by-step through the mechanics of large-bank failures. He identifies where the cracks first appear when a dealer bank is weakened by severe trading losses, and demonstrates how the bank's relationships with its customers and business partners abruptly change when its solvency is threatened. As others seek to reduce their exposure to the dealer bank, the bank is forced to signal its strength by using up its slim stock of remaining liquid capital.

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