Response to Crisis (2012:12epa)


The lessons learned from the banking panics preceding World War II had been all but forgotten when the financial crisis erupted five years ago. This European Policy Analysis advocates two reforms to reduce the likelihood of another financial calamity.

The first would require that financial executives be remunerated in part with equity shares carrying double liability in the case of institutional default. The second reform would give the central banks one more policy instrument. This paper recommends control of bank reserves reinforced by reserve requirements on the demand or overnight liabilities of all financial institutions.

The analysis is published in the context of SIEPS´ research project EU and EMU after the economic crisis.

Axel Leijonhufvud is Professor Emeritus of Economics at UCLA and also Professore emerito at the University of Trento.