This article identifies two paradoxes prior to the onset of the financial crisis: banking profits were at historically high levels despite the impending crisis; and though profits were high the profitability of financial intermediation was poor. Using a novel model of banking, it argues that...

Prior to the 2007–2008 financial crisis, banking sector profits were very high but the profitability of financial intermediation was poor. Using a novel model of banking, this article argues that the high profits were achieved through balance sheet expansion and growing default, liquidity, and...