Financial markets and institutions, 7th ed.

Abstract

What’s New in the Seventh Edition In addition to the expected updating of all data through 2010 whenever possible, there is major new material in every part of the text. The Global Financial Crisis The global financial crisis of 2007–2009 has led to a series of events that have completely changed the structure of the financial system and the way central banks operate. This has required a rewriting of almost the entire textbook, including a new chapter, a rewrite of one whole chapter, and addition of many new sections, applications, and boxes throughout the rest of the book. New Chapter 8: “Why Do Financial Crises Occur and Why Are They So Damaging to the Economy?” With the coming of the subprime financial crisis, a financial markets and institutions textbook would not be complete without an extensive analysis of financial crises like the recent one. Using an economic analysis of the effects of asymmetric information on financial markets and the economy, this new chapter greatly expands on the discussion of financial crises that was in the previous edition to see why financial crises occur and why they have such devastating effects on the economy. This analysis is used to explain the course of events in a number of past financial crises throughout the world, with a particular focus on explaining the recent financial crisis. Because the recent events in the financial crisis have been so dramatic, the material in this chapter is very exciting for students. Indeed, when teaching this chapter after I returned to Columbia, the students were the most engaged with this material than anything else I have taught in my entire career of over 30 years of teaching. Reordering of Part 6, “Financial Institutions,” and Rewrite of Chapter 18, “The Economic Analysis of Financial Regulation” In past editions, the chapter on the structure of the banking industry was followed by the chapter on banking regulation. This ordering no longer makes sense in the aftermath of the recent financial crisis, because nonbank financial institutions, such as investment banks, have for the most part disappeared as free-standing institutions and are now part of banking organizations. To reflect the new financial world that we have entered, we should first discuss the financial industry as a whole and then look at the specifics of how the now more broadly based banking industry is structured. To do this, we have moved the chapter on regulation to come before the chapter on the structure of the banking industry and have rewritten it to focus less on bank regulation and more on regulation of the overall financial system. Compelling New Material on the 2007–2009 Financial Crisis Throughout the Text The recent financial crisis has had such far-reaching effects on the field of financial markets and institutions that almost every chapter has required changes to reflect what has happened. A large amount of substantive new material on the impact of the financial crisis has also been added throughout the book, including: • A new “Case” on the subprime collapse and the Baa-Treasury spread (Chapter 5) • A new “Mini-Case” on credit-rating agencies and the 2007–2009 financial crisis (Chapter 7) • A new “Inside the Fed” box on Federal Reserve lender-of-last-resort facilities during the 2007–2009 financial crisis (Chapter 10) • A new section on lessons from the financial crisis as to how central banks should respond to asset price bubbles (Chapter 10) • A new section on the role of asset-backed commercial paper in the financial crisis (Chapter 11) • A new section on the subprime financial crisis and the bailout of Fannie Mae and Freddie Mac (Chapter 12) • A new section on credit default swaps and their role in the financial crisis (Chapter 12) • A new section on the subprime financial crisis and the stock market (Chapter 13) • An expanded coverage of mortgage pass-through securities that relates collateralized mortgage obligations to subprime mortgages and to the financial crisis (Chapter 14) • A new section on the real estate bubble (Chapter 14) • A new “Case” on the financial crisis and the dollar (Chapter 15) • A new “Case” on how a capital crunch caused a credit crunch in 2008 (Chapter 17) • A new section on the Dodd-Frank bill and future regulation (Chapter 18) • A new “Mini-Case” on mark-to-market accounting and the financial crisis (Chapter 18) • A new “Mini-Case” on the financial crisis and consumer protection regulation (Chapter 18) • A new “Mini-Case” on the money market mutual fund panic of 2008 (Chapter 19) • A new “Mini-Case” on the demise of large, free-standing investment banks (Chapter 19) • A new section on the impact of credit default swaps on the insurance industry and the bailout of AIG (Chapter 21) • A new “Case” on lessons from the subprime financial crisis: when are financial derivatives likely to be a worldwide time bomb (Chapter 24).