Research Video: Never before have so few owed so much to so many

The current economic crisis has put banking and the financial system in the spotlight. The generalized bailouts of financial institutions in distress have required huge transfers from taxpayers to financial institutions. Professor Xavier Freixas (UPF and Barcelona GSE) describes this historic phenomenon with one phrase: never before have so few owed so much to so many.

"With this statement I'm inverting a famous saying by Winston Churchill," Prof. Freixas explains. "These bailouts represent an unprecedented defiance of the logic of redistribution, with devastating consequences for millions of people who are now bearing the cost of the failed high-risk ventures of a small group of investors."

"What we are witnessing is an unprecedented defiance of the logic of redistribution."

Prof. Freixas argues that recent changes in banking regulation may lead to a more efficient banking and financial industry, but he acknowledges there is still work to be done to ensure the protection of taxpayers.

"In order to reduce the cost of a crisis to taxpayers, what is required is a consistent bankruptcy and bail-out procedure that minimizes that cost, has legal certainty, and is known in advance to the investors that hold the claims issued by financial institutions," Prof. Freixas says.

"Basel III avoids the issue of banks' bankruptcy, and this is a huge mistake."

Specifically, Prof. Freixas notes that this protection is lacking in the recent Basel III proposal. "Basel III avoids the issue of banks' bankruptcy, and this is a huge mistake. It leads to situations like the one we saw with Northern Rock, where the government ended up bailing out both depositors and equity holders, who obtained a high remuneration for the risk they were bearing, but in the end were not bearing any risk at all.

"Basel III is a good start, but we still have a lot of work to do in order to avoid the same kind of devastating consequences for taxpayers when future crises hit," Prof. Freixas says.

Watch this research video (04:30)

Research Video - Xavier Freixas


About Prof. Xavier Freixas

Xavier Freixas (PhD, Toulouse 1978) is Dean of the Undergraduate School of Economics and Business Administration, Professor at the Universitat Pompeu Fabra, and Barcelona GSE Affiliated Professor. He is also Research Fellow at CEPR and Chairman of the Risk Based Regulation Program of the Global Association of Risk Professionals (GARP).

He is past president of the European Finance Association and was previously Deutsche Bank Professor of European Financial Integration at Oxford University, Houblon Norman Senior Fellow of the Bank of England and Joint Executive Director Fundación de Estudios de Economía Aplicada (FEDEA). From 1989-1991 he was Professor at Montpellier and Toulouse Universities.

Prof. Freixas has been a consultant for the European Investment Bank, the New York Federal Reserve, the European Central Bank, the World Bank, the Inter-American Development Bank, MEFF and the European Investment Bank.

He has published a number of papers in the main economic and finance journals, among them Journal of Financial Economics, Review of Financial Studies, Econometrica, and Journal of Political Economy. He is Associate Editor of Journal of Financial Intermediation, Review of Finance, Journal of Banking and Finance, and Journal of Financial Services Research.

His research contributions deal with the issues of payment systems risk, contagion and the lender of last resort. He is well known for his research work in the banking area, which has been published in the main journals in the field, as well as for his book Microeconomics of Banking (MIT Press, 1997), co-authored with Jean-Charles Rochet.


Prof. Xavier Freixas (UPF and Barcelona GSE) plays on the famous words of British Prime Minister Winston Churchill to explain the impact of bank bailouts on taxpayers during the recent global financial crisis.



More from Prof. Freixas

"Why didn't anybody notice? Economists and the crisis" [video]

Financial Institutions Management [pdf] course syllabus

Master Program in Finance

Barcelona Banking Summer School