The Business Models of Large Interconnected Banks and the Lessons of the Financial Crisis

Abstract

This paper looks at the urgent and ongoing need to change the business models of global systemically important banks — particularly those that dominate the OTC derivatives markets which carry massive counterparty risk via collateralisation practices. It explores the three main lessons of the financial crisis: too big to fail, excess leverage and conflicts of interest. While regulatory reforms have been plentiful, none have adequately addressed the main source of the problems which lie in the very nature of the business models of large interconnected banks.