Research profile: Finding a fix to financial crisis
In the 1980s the government asked Professor Ron Giammarino and his colleagues to examine issues related to banking policies in Canada as a result of the American move to deregulation.
Fortunately for Canada, and Dr. Giammarino, his work resulted in a more stable industry that served Canadians well up to and during the financial turmoil of 2008. His work is not over, however, as new challenges emerge from the current and volatile situation in Europe.
Dr. Giammarino has been working with a PhD student to apply lessons learned from past bank regulation research to address the current global financial crisis resurrecting his previous research. Specifically he is looking at how banks may benefit from the belief that they will be bailed out by the government.
Based on the results of the depression of the 1930s when banks defaulted and declined to refund consumers their deposits, he became interested in what might happen if a similar situation was to occur again in Canada. “We already know what happens when banks do not pay back deposits,” suggests Dr. Giammarino. “People are unable to access their money, cannot buy goods and services, leading to lay-offs and significant numbers of people who can’t pay off their loans.”
The recent incarnation of this concern has resulted from the bad loans that many banks made in the form of defaulted mortgages. When a significant number of mortgages go unpaid, the funders stop lending, consumer confidence erodes and they withdraw large sums of money from their banks. In order to mitigate the negative impact of this occurrence, governments are now more inclined to step in via the formal system of deposit insurance that was instituted in this country.
“There is an irony here,” suggests Dr. Giammarino, “as a result of the enhanced expectation created by this program that the banks can afford to take on higher risk. They know the government will bail them out thus may approve high risk loans hoping that they will pay off in significant profits. If they don’t work out, however, the bank still wins because the government pays the money back.”
This dichotomy is what fascinates Professor Giammarino, as he seeks to find answers to questions that have arisen in regards to determining appropriate supports for banks and their depositors during time of financial crisis. He wants to see improvements in our regulatory programs in order to preserve the value of free markets, while protecting the people whose money is deposited in our financial institutions.
Dr. Giammarino’s research is of interest to most people in Canada who are saving for retirement, purchasing their first home, or investing in the stock market. We all want to see a balance between a total free market, and one that mitigates risk.
Read more information on Dr. Giammarino’s work.