The Great Financial Crisis, which started in 2007-08, was originally
called the 'sub-prime' crisis because its origins could be traced to
excessive lending in the real estate sector in the US, concentrated
mostly in sunbelt states like Nevada, Florida and California. There were
similar pockets of excess lending for housing in Europe, notably in
Ireland and Spain. But a key difference emerged later: in Ireland and
Spain, the local banking systems almost collapsed and the governments
experienced severe financial stress with large macroeconomic costs.
Nothing similar happened in the US. The local financial system remained
fully functional and the local governments did not experience increased
financial stress in the states with the biggest real estate booms, like
Nevada or Florida. This book illustrates how the structure of the US
banking market and the existence of federal institutions allowed
regional financial shocks to be absorbed at the federal level in the US,
thus avoiding local financial crisis. The authors argue that the
experience of the US shows the importance of a 'banking union' to avoid
severe regional (national) financial dislocation in the wake of regional
boom and bust cycles. They also discuss the extent to which the
institutions of the partial banking union, now in the process of being
created for the euro area, should be able to increase its capacity to
deal with future regional boom and bust cycles, thereby stabilising the
single currency.
