Global Financial Systems

Financial Times
Jon Danielsson  
Total pages
August 2013
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Global Financial Systems
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Global Financial Systems is an innovative, interdisciplinary text that explores the ‘why’ behind global financial stability. Danielsson draws on economic theory, finance, mathematical modelling, risk theory, and policy to posit a coherent and current analysis of the global financial system.


  • An opening example, article or journal excerpt to frame the issues in the chapter and pique student interest
  • Frequent examples and cases used to illustrate or substantiate arguments made in the text
  • Chapter summaries that confirm key issues from each chapter
  • Chapter-end questions that provoke discussion and critical thinking

Supplementary resources include:

  • Instructor’s manual, with case study debriefs, further reading suggestions, and tutorial ideas
  • Class-tested PowerPoint slides, including the financial models presented and other important themes from each chapter
  • A author-hosted website, featuring regular updates on current events in the global financial system, links to useful websites, and further assessment material

Table of Contents

Author’s acknowledgements

Publishers’ acknowledgments




1 Systemic risk

1.1 Case study: the 1914 crisis

1.2 The concept of systemic risk

1.3 Who creates systemic risk?

1.4 Fundamental origins of systemic risk

1.5 Summary




2 The Great Depression 1929–1933

2.1 Build-up to a depression

2.2 The Great Depression

2.3 Causes of the Great Depression

2.4 Implications for future policy

2.5 Summary


3 Endogenous risk


3.1 Millennium Bridge

3.2 Dual role of prices

3.3 Risk

3.4 Dynamic trading strategies

3.5 Actual and perceived risk and bubbles

3.6 The LTCM crisis of 1998

3.7 Conclusion


4 Liquidity


4.1 The liquidity crisis of 1998

4.2 What is liquidity?

4.3 Liquidity models

4.4 Policy implications

4.5 Summary




5 The central bank


5.1 The origins of central banks

5.2 Banking supervision

5.3 Monetary policy

5.4 Financial stability

5.5 Bailing out governments

5.6 Challenges for central banking

5.7 Summary


Appendix: central bank interest rate




6 The Asian Crisis of 1997 and the IMF

6.1 Building up to a crisis

6.2 The crisis in individual countries

6.2.3 South Korea

6.3 Reasons for the crisis

6.4 Policy options for the crisis countries

6.5 Role of the IMF

6.6 Wider lessons

6.7 Summary




7 Banking crises


7.1 Money and early banking

7.2 Moral hazard

7.3 Costs of banking crises

7.4 Causes of banking crises

7.5 Bank and banking system failures

7.6 Summary




8 Bank runs and deposit insurance


8.1 Bank runs and crises

8.2 Modelling deposit insurance

8.3 Pros and cons of deposit insurance

8.4 Summary




9 Trading and Speculation


9.1 Trading scandals and abuse

9.2 Trading and risk

9.3 Trading activities

9.4 Policy issues

9.5 Summary




Appendix: basic terminology of trading


10 Credit markets


10.1 Market for credit

10.2 Credit rating agencies

10.3 Credit models

10.4 Margins, haircuts and mark–to–market

10.5 Securitisation

10.6 Summary


11 Currency markets


11.1 Fixed or floating

11.2 Foreign exchange interventions

11.2.1 Sterilisation

11.3 Capital controls

11.4 Exchange rate regimes

11.5 Perils of overvaluation

11.6 Undervaluation and ‘currency wars’

11.7 Reserve currency

11.8 Summary


Appendix: exchange rate regimes




12 Currency crisis models


12.1 First-generation models

12.2 The Argentinean crisis

12.3 Second-generation models

12.4 European crisis 1992–1993

12.5 Global games currency crisis model

12.6 Summary




13 Financial regulations

13.1 Banking regulations

13.2 Bank capital

13.3 International financial regulations: Basel

13.4 Summary


Appendix: Value-at-Risk




14 Bailouts


14.1 Successful and unsuccessful bailouts

14.2 The historical origins of lending of last resort (LOLR)

14.3 What are bailouts?

14.4 Alternatives to bailouts

14.5 Bailouts in the crisis starting in 2007

14.6 Bailouts, moral hazard and politics

14.7 Model of asset bubbles

14.8 Summary




15 Dangerous financial instruments


15.1 Complexity kills

15.2 Derivatives

15.3 Credit default swaps

15.4 Collateralised debt obligations

15.5 Summary


Appendix A: mechanics of CDSs


Appendix B: CDO calculations




16 Failures in risk management and regulations before the crisis

16.1 Regulatory failures

16.2 Capital and the crisis

16.3 Summary




17 The ongoing crisis: 2007–2009 phase


17.1 Build-up to a crisis

17.2 Hidden and ignored risk

17.3 The changing nature of banking

17.4 Crisis 2007–2008

17.5 Was it a subprime crisis?

17.6 Policy response

17.7 Summary




18 Ongoing developments in financial regulation


18.1 New and changed institutions

18.2 Basel III

18.3 Liquidity

18.4 How much capital?

18.5 Recovery and resolution

18.6 What about too big to fail?

18.7 Summary




19 Sovereign debt crises


19.1 Newfoundland

19.2 Sovereign debt

19.3 Enforcement

19.3.1 History lessons

19.4 Background to the European sovereign debt crisis

19.5 Summary









Back Cover

Global Financial Systems: Stability and Risk

Jon Danielsson


  • Under what circumstances have we achieved financial stability?
  • Which previous crises inform the current ones and in what way?
  • What are the common themes and lessons for policy, regulation and financial theory?



Global Financial Systems: Stability and Risk is an innovative textbook that explores the ‘why’ behind global financial stability, providing insightful discussions on the international financial system and the contemporary issues of today. Drawing on economic theory, finance, mathematical modelling and risk theory, this book presents a comprehensive, coherent and current economic analysis of the inherent instabilities of the financial system, and the design of optimal policy response.



Key features


  • Up-to-date and thorough analysis of the 2007/08 financial crisis.
  • News articles and journal excerpts are used throughout to frame the issues in each chapter.
  • Case studies and practical examples illustrate key arguments and apply the theory to the real world.
  • Chapter-end questions provoke discussion and critical thinking, and provide opportunities to test your understanding.
  • An Instructor Resource Centre including PowerPoint slides, plus an author-hosted website featuring regular updates on current events in the global financial system and links to useful websites.


Jon Danielsson is Director of the Systemic Risk Centre, London School of Economics, and Reader in Finance.