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Capital FailureRebuilding Trust in Financial Services$
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Nicholas Morris and David Vines

Print publication date: 2014

Print ISBN-13: 9780198712220

Published to Oxford Scholarship Online: October 2014

DOI: 10.1093/acprof:oso/9780198712220.001.0001

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A Short History of Crisis and Reform

A Short History of Crisis and Reform

(p.79) 4 A Short History of Crisis and Reform
Capital Failure

Richard Davies

Oxford University Press

Crisis and reform go hand in hand in banking: crashes lead to new rules, regulations, and institutions that have an impact for decades. Focusing on five episodes from 1792 to 1929–33, this chapter argues that these crises provide lessons for today. First, the ‘search for yield’ and a systematic underestimation of risk were always present. Second, following a crisis the state often increased the safety net that underpins the financial system. Over time this has driven a wedge between the interests of banks’ managers and their owners and creditors. Loosening the link between a bank’s financial stability and the rewards of its managers changes the environment in which non-economic incentives like duties and social norms operate and makes regulation harder. Finally, getting regulation right matters as it shapes finance for decades to come. Some of today’s problems, including ‘too big to fail’, rest on regulatory decisions made long ago.

Keywords:   financial crises, financial stability, incentives, financial regulation, financial safety net

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