IDEAS home Printed from https://ideas.repec.org/a/eee/soceco/v39y2010i2p119-126.html
   My bibliography  Save this article

Causes of the financial crisis: Risk misperception, policy mistakes, and banks' bounded rationality

Author

Listed:
  • Rötheli, Tobias F.

Abstract

This article describes important determinants of the current financial crisis. In particular, the text focuses on the bounded rationality of banks which contributes to the credit cycle. The credit cycle is the mechanism that links the present financial crisis with earlier crisis. Shortcomings on the side of monetary policy, rating agencies, and bank regulation are also discussed. We propose measures to strengthen the stabilizing effect of market forces, banks' risk management, as well as possible changes to regulation and monetary policy.

Suggested Citation

  • Rötheli, Tobias F., 2010. "Causes of the financial crisis: Risk misperception, policy mistakes, and banks' bounded rationality," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 39(2), pages 119-126, April.
    • Handle: RePEc:eee:soceco:v:39:y:2010:i:2:p:119-126
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/B6W5H-4YDYSH4-1/2/a9d8d80833916ab2af59e68f3bf85480
    Download Restriction: Full text for ScienceDirect subscribers only
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. repec:fip:fedgsq:y:2008:x:76 is not listed on IDEAS
    2. Adrian, T. & Shin, H S., 2009. "The shadow banking system: implications for fi nancial regulation," Financial Stability Review, Banque de France, issue 13, pages 1-10, September.
    3. Gabriel Jiménez & Jesús Saurina, 2006. "Credit Cycles, Credit Risk, and Prudential Regulation," International Journal of Central Banking, International Journal of Central Banking, vol. 2(2), May.
    4. Zingales Luigi, 2008. "Plan B," The Economists' Voice, De Gruyter, vol. 5(6), pages 1-5, October.
    5. Ben S. Bernanke, 2008. "Risk management in financial institutions," Proceedings 1070, Federal Reserve Bank of Chicago.
    6. Goodhart, C., 2008. "Liquidity risk management," Financial Stability Review, Banque de France, issue 11, pages 39-44, February.
    7. Hughes, Joseph P. & Lang, William W. & Mester, Loretta J. & Moon, Choon-Geol & Pagano, Michael S., 2003. "Do bankers sacrifice value to build empires? Managerial incentives, industry consolidation, and financial performance," Journal of Banking & Finance, Elsevier, vol. 27(3), pages 417-447, March.
    8. Rotheli, Tobias F., 2001. "Competition, herd behavior, and credit cycles: evidence from major Swiss Banks," Journal of Economics and Business, Elsevier, vol. 53(6), pages 585-592.
    9. Foos, Daniel & Norden, Lars & Weber, Martin, 2010. "Loan growth and riskiness of banks," Journal of Banking & Finance, Elsevier, vol. 34(12), pages 2929-2940, December.
    10. Thomas M. Humphrey, 1989. "Lender of last resort: the concept in history," Economic Review, Federal Reserve Bank of Richmond, vol. 75(Mar), pages 8-16.
    11. Raghuram G. Rajan, 1994. "Why Bank Credit Policies Fluctuate: A Theory and Some Evidence," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 109(2), pages 399-441.
    12. Buiter, Willem, 2007. "Lessons from the 2007 Financial Crisis," CEPR Discussion Papers 6596, C.E.P.R. Discussion Papers.
    13. De Long, J Bradford & Andrei Shleifer & Lawrence H. Summers & Robert J. Waldmann, 1990. "Noise Trader Risk in Financial Markets," Journal of Political Economy, University of Chicago Press, vol. 98(4), pages 703-738, August.
    14. Karl E. Case & Robert J. Shiller, 2003. "Is There a Bubble in the Housing Market?," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 34(2), pages 299-362.
    15. John B. Taylor, 2009. "The Financial Crisis and the Policy Responses: An Empirical Analysis of What Went Wrong," NBER Working Papers 14631, National Bureau of Economic Research, Inc.
    16. Jose A. Lopez, 2008. "What is liquidity risk?," FRBSF Economic Letter, Federal Reserve Bank of San Francisco, issue oct24.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Siddiqi, Hammad, 2015. "Anchoring Heuristic in Option Pricing," Risk and Sustainable Management Group Working Papers 207677, University of Queensland, School of Economics.
    2. Siddiqi, Hammad, 2015. "Analogy Based Valuation of Currency Options," MPRA Paper 62333, University Library of Munich, Germany.
    3. Siddiqi, Hammad, 2015. "Analogy Based Valuation of Currency Options," Risk and Sustainable Management Group Working Papers 198776, University of Queensland, School of Economics.
    4. O'Callaghan, Patrick, 2015. "Minimal conditions for parametric continuity of a utility representation," Risk and Sustainable Management Group Working Papers 200371, University of Queensland, School of Economics.
    5. Ahmad Raza Bilal & Noraini Bt. Abu Talib & Mohd Noor Azli Ali Khan, 2013. "Remodeling of risk management in banking: evidence from the sub-continent and gulf," Journal of Risk Finance, Emerald Group Publishing, vol. 14(5), pages 468-489, November.
    6. Ahmad Raza Bilal & Noraini Bt. Abu Talib & Mohd Noor Azli Ali Khan, 2013. "Remodeling of risk management in banking: evidence from the sub-continent and gulf," Journal of Risk Finance, Emerald Group Publishing Limited, vol. 14(5), pages 468-489, November.
    7. Siddiqi, Hammad, 2015. "Anchoring Heuristic in Option Pricing," MPRA Paper 63218, University Library of Munich, Germany.
    8. Miklós Antal & Ardjan Gazheli & Jeroen C.J.M. van den Bergh, 2012. "Behavioural Foundations of Sustainability Transitions. WWWforEurope Working Paper No. 3," WIFO Studies, WIFO, number 46424.
    9. Siddiqi, Hammad, 2015. "Relative Risk Perception and the Puzzle of Covered Call Writing," Risk and Sustainable Management Group Working Papers 199882, University of Queensland, School of Economics.
    10. Ding, Cherng G. & Wu, Chiu-Hui & Chang, Pao-Long, 2013. "The influence of government intervention on the trajectory of bank performance during the global financial crisis: A comparative study among Asian economies," Journal of Financial Stability, Elsevier, vol. 9(4), pages 556-564.
    11. Siddiqi, Hammad, 2014. "Anchoring Heuristic in Option Prices," MPRA Paper 66018, University Library of Munich, Germany, revised 15 Jul 2015.
    12. Ammar Ahmed & Ismail bin Lebai Othman, 2017. "The Impact of Strategic Attributes on Organizational Performance in Pakistan Banking Sector: A Review and Suggestions for Future Research," International Journal of Academic Research in Business and Social Sciences, Human Resource Management Academic Research Society, International Journal of Academic Research in Business and Social Sciences, vol. 7(8), pages 371-387, August.
    13. Siddiqi, Hammad, 2015. "Relative Risk Perception and the Puzzle of Covered Call writing," MPRA Paper 62763, University Library of Munich, Germany.
    14. Siddiqi, Hammad, 2015. "Explaining the Smile in Currency Options: Is it Anchoring?," MPRA Paper 63528, University Library of Munich, Germany.
    15. Siddiqi, Hammad, 2015. "Anchoring and Adjustment Heuristic in Option Pricing," MPRA Paper 68595, University Library of Munich, Germany.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. John Bonin & Marko Kosak, 2013. "Loan/Loss Provisioning in Emerging Europe: Precautionary or Pro-Cyclical?," Wesleyan Economics Working Papers 2013-010, Wesleyan University, Department of Economics.
    2. Giovanni Dell’ariccia & Deniz Igan & Luc Laeven, 2012. "Credit Booms and Lending Standards: Evidence from the Subprime Mortgage Market," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 44, pages 367-384, March.
    3. Hirshleifer, David & Teoh, Siew Hong, 2008. "Thought and Behavior Contagion in Capital Markets," MPRA Paper 9164, University Library of Munich, Germany.
    4. Suren Pakhchanyan & Jörg Prokop & Gor Sahakyan, 2018. "Drivers of Bank Solvency, Risk Provisioning and Profitability in the Armenian Banking System," Journal of Emerging Market Finance, Institute for Financial Management and Research, vol. 17(3), pages 307-332, December.
    5. Maryem Naili & Younes Lahrichi, 2022. "The determinants of banks' credit risk: Review of the literature and future research agenda," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 27(1), pages 334-360, January.
    6. Niu, Jijun, 2016. "Loan growth and bank valuations," The Quarterly Review of Economics and Finance, Elsevier, vol. 61(C), pages 185-191.
    7. Kick, Thomas & Pausch, Thilo & Ruprecht, Benedikt, 2015. "The winner's curse: Evidence on the danger of aggressive credit growth in banking," Discussion Papers 32/2015, Deutsche Bundesbank.
    8. Laidroo, Laivi & Männasoo, Kadri, 2017. "Do credit commitments compromise credit quality?," Research in International Business and Finance, Elsevier, vol. 41(C), pages 303-317.
    9. Hertrich Markus, 2019. "A Novel Housing Price Misalignment Indicator for Germany," German Economic Review, De Gruyter, vol. 20(4), pages 759-794, December.
    10. Krainer, Robert E., 2013. "Towards a program for financial stability," Journal of Economic Behavior & Organization, Elsevier, vol. 85(C), pages 207-218.
    11. Claudio Borio & Mathias Drehmann, 2011. "Toward an Operational Framework for Financial Stability: “Fuzzy” Measurement and Its Consequences," Central Banking, Analysis, and Economic Policies Book Series, in: Rodrigo Alfaro (ed.),Financial Stability, Monetary Policy, and Central Banking, edition 1, volume 15, chapter 4, pages 063-123, Central Bank of Chile.
    12. Marc Hayford & Anastasios Malliaris, 2010. "Asset Prices and the Financial Crisis of 2007--09: An Overview of Theories and Policies," Forum for Social Economics, Taylor & Francis Journals, vol. 39(3), pages 279-286, January.
    13. Ebrahimi Kahou, Mahdi & Lehar, Alfred, 2017. "Macroprudential policy: A review," Journal of Financial Stability, Elsevier, vol. 29(C), pages 92-105.
    14. Robert Kelly & Kieran Mcquinn & Rebecca Stuart, 2011. "Exploring the Steady-State Relationship Between Credit and GDP for a Small Open Economy–The Case Of Ireland," The Economic and Social Review, Economic and Social Studies, vol. 42(4), pages 455-477.
    15. Piccoli, Pedro, 2022. "Valuating consumer credit portfolios," Latin American Journal of Central Banking (previously Monetaria), Elsevier, vol. 3(3).
    16. Wahyoe Soedarmono & Amine Tarazi & Agusman Agusman & Gary S. Monroe & Dominic Gasbarro, 2016. "Loan Loss Provisions and Lending Behavior of Banks: Do Information Sharing and Borrower Legal Rights Matter?," Working Papers hal-01316717, HAL.
    17. Pallavi Chavan & Leonardo Gambacorta, 2016. "Bank lending and loan quality: the case of India," BIS Working Papers 595, Bank for International Settlements.
    18. Eickmeier, Sandra & Hofmann, Boris, 2013. "Monetary Policy, Housing Booms, And Financial (Im)Balances," Macroeconomic Dynamics, Cambridge University Press, vol. 17(4), pages 830-860, June.
    19. Mark Mink, 2011. "Procyclical Bank Risk-Taking and the Lender of Last Resort," DNB Working Papers 301, Netherlands Central Bank, Research Department.
    20. Ravn, Søren Hove, 2016. "Endogenous credit standards and aggregate fluctuations," Journal of Economic Dynamics and Control, Elsevier, vol. 69(C), pages 89-111.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:soceco:v:39:y:2010:i:2:p:119-126. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/inca/620175 .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.