The largest U.S. banks have global operations, which means that the European financial crisis will have an adverse affect on their operations in that area. Conversely, the largest European banks have operations in the U.S. Some of those banks will also feel the impact of the crises in the PIIGS countries.
Do you see any common thread among the Asian financial crisis in the mid-'90s, the financial crisis of 2008, and what's going on in Europe now?
The simple answer in two words is "real estate." At one point in the '90s, the value of real estate in Tokyo was worth more than the value of real estate in California. Similarly, there were real estate problems in the U.S. and Europe.
What is often overlooked is "population growth," which is the major driver of the demand for real estate loans. Population growth is going to continue -- and so will the demand for real estate over the years to come.
For more information on the role of real estate in financial crises, see my other books: "International Banking Crises: Large-Scale Failures, Massive Government Interventions" and "Financial Institutions: A Guide for Directors, Investors, and Counterparties."
What do you think of Operation Twist, the Fed's plan to sell short-term Treasuries to buy long-term Treasuries in a bid to reduce long-term interest rates?
The Fed is using the limited number of tools available to them to facilitate economic growth. But they can't do it alone -- the government must intervene and take positive actions to stimulate economic growth.
How can central banks and the international banking system work to reduce the severity of future banking crises?
As previously noted, our major banks have global operations, and the major foreign banks have operations in the U.S. Therefore, the Basel Committee's higher capital standards is a good starting point. The banks don't like it because of the additional costs. However, higher capital standards make it less likely that banks will fail.
We would like to thank Benton E. Gup, Ph.D., professor of finance at Culverhouse College of Commerce and the Cochrane/Alabama Bankers chair of economics, finance and legal studies for offering his insights. Questions for this interview contributed by Holden Lewis, assistant managing editor for Bankrate.com.