Innovator Article

Banking Expert Foretold Risk that Led to Global Financial Crisis
Robert Marquez Joins Faculty

By Robert Preer

As U.S. housing prices peaked during the real estate bubble in 2006, Boston University Associate Professor Robert Marquez and Giovanni Dell’Ariccia of the International Monetary Fund wrote a compelling paper showing that when banks have easy access to capital and demand for credit is high, the tendency is to take excessive risks that could endanger the financial system.

Their study, “Lending Booms and Lending Standards,” published in the Journal of Finance, offered an explanation for the sequence of financial liberalization, lending booms and banking crises observed in many emerging markets. It proved to be a telling recipe for financial disaster that could, and did, spread globally, with devastating impacts.

Two years later, the contagion hit the U.S. as many banks that had expanded their portfolios when interest rates were low saw their sub-prime mortgage loans suddenly go bad, and the collateralized debt obligations on those loans sold to investors globally fell apart. Retail and investment banks collapsed, and a global financial crisis followed. Marquez’s paper foretold the rise of systematic risk in the interconnected financial system.

“We never thought about it as a ‘crisis paper,’ but looking back, a lot of its implications are consistent with what we observed in the crisis,” Marquez said in an interview this spring in his office at Boston University, as he prepared for what he hopes will be the last in a series of cross-country relocations.

In the popular press, it has been taken for granted that a cause of the crisis was that institutions were operating in an environment of low interest rates. But when you look at the economic literature, there were no models that would have predicted that. . . . I am trying to find out what causes banks to do what they do.”

– Professor Robert Marquez

A leading expert in banking and corporate finance, Marquez joined the Graduate School of Management faculty in July.

A native of Southern California, Marquez earned his undergraduate degree in economics from the University of California, Berkeley in 1990, then worked for several years for the Federal Reserve in San Francisco. He headed east for graduate school, earning a Ph.D. in economics from MIT in 1998.

He spent eight years on the faculty of the University of Maryland before accepting a faculty post at Arizona State University’s W. P. Carey School of Business. After three years there, he crossed the country again to Boston University, where he was an associate professor of finance.

Married with two young children, Marquez is happy to return to California. “I grew up there and have family there,” he said. “Boston is a very nice place to live, but sometimes once-in-a-lifetime opportunities come along. We see this as a permanent move.” Marquez’s wife, Elizabeth Bailey, also an economist, will become executive director of the Energy Institute at UC Berkeley’s Haas School of Business.

Professor Brad Barber says Marquez is “a stellar addition” to the Graduate School of Management community. “Robert brings years of experience in research and teaching at a number of institutions,” Barber said. “More importantly, his research on the structure of the banking industry is both timely and influential. He is one of the leading theorists on banking issues, and we are fortunate to have him at UC Davis.”

In his research, Marquez uncovers the mechanisms that underlie the behavior of financial institutions. “I work with models and equations and try to study the implications for markets.”

One important focus of his research now is the effect low interest rates have on banks and whether they encourage banks to take on more leverage. To understand the recent crisis and perhaps find ways to avoid crises in the future, we need to know what happens inside banks, according to Marquez. “I am trying to find out what causes banks to do what they do.”


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