Darrell Duffie: How big banks fail and what to do about it: Princeton University Press, 2010, 112 pages, approx. 30 USD, ISBN: 0691148856

Financ Mark Portf Manag (2013) 27:253256 DOI 10.1007/s11408-013-0206-9

BOOK REVIEW

Darrell Dufe: How big banks fail and what to do about it

Princeton University Press, 2010, 112 pages, approx. 30 USD, ISBN: 0691148856

Jan Wrampelmeyer

Published online: 31 March 2013 Swiss Society for Financial Market Research 2013

When I was asked to write a book review of Darrel Dufes book How big banks fail and what to do about it, I accepted with great pleasure. Darrel Dufe, Dean Witter Distinguished Professor of Finance at the Graduate School of Business, Stanford University, is one of the leading scholars in nancial economics and has written numerous brilliant research articles and books on nancial markets and institutions. How big banks fail and what to do about it is no exception as it neatly explains the key underlying mechanisms that can cause large nancial institutions to fail. The main theme of the book is that short-term repo funding, prime brokerage, and OTC derivatives are prone to runs similar to classic bank runs on demand deposits. Therefore, these contracts entail signicant systemic risk, as became obvious during the 20072009 nancial crisis. As the title suggests, the book not only describes failure mechanisms, but concludes by proposing various revisions to regulation and market infrastructure to overcome the vulnerability of dealer banks and to strengthen the resilience of the nancial system in the United States. Darrel Dufe describes complicated concepts in an accessible way and the book is thus not only interesting for academics and regulators, but also for practitioners and investors who would like to know more about the plumbing of the nancial system.

The book, which is an extended version of the research article The failure mechanics of dealer banks (Dufe 2010), is organized in ve chapters. The introduction tells the story of a hypothetical bank that needs to declare bankruptcy after it runs out of liquidity, resembling the demise of Bear Stearns in March 2008. After an initial weakening of its capital position, the bank bails out clients, takes positions in liquidity draining derivative positions, and allows brokerage clients to leave to maintain the

J. Wrampelmeyer (B)

University of St. Gallen, Swiss Institute of Banking and Finance, Rosenbergstrasse 52, 9000 St. Gallen, Switzerlande-mail: [email protected]

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