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Reflections on the crisis and on its lessons for regulatory reform and for central bank policies

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  • Cukierman, Alex

Abstract

This paper discusses the problems exposed by the global financial crisis in the areas of financial regulation and supervision and possible solutions. It describes and evaluates current proposals regarding the role of the central bank as a systemic regulator, the pros and the cons of locating financial supervision in the central bank, and the conflicts and synergies that such an arrangement entails. Once a crisis erupts, central bank liquidity injections constitute a first line of defense. But in the longer term these injections create a trade-off between price and financial stability, and may compromise central bank independence. Problems exposed by the crisis include the growth of a poorly regulated shadow financial system, shortermism in executive compensation packages and consequent adverse incentive effects, the too-big-to-fail problem, procyclicality in the behavior of financial institutions, conflicts of interest in the rating agencies industry and the trade-off between the scope of intermediation through securitization and transparency in the valuation of assets. The paper also discusses international dimensions including international cooperation in regulatory reform and the scope for limiting exchange rate variability. The conclusion points out inherent difficulties in distinguishing ex ante between a fundamentals based expansion and a "bubble."

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Financial Stability.

Volume (Year): 7 (2011)
Issue (Month): 1 (January)
Pages: 26-37

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Handle: RePEc:eee:finsta:v:7:y:2011:i:1:p:26-37

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Web page: http://www.elsevier.com/locate/jfstabil

Related research

Keywords: Regulation Supervision Institutions Externalities Bubbles;

References

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  1. Klomp, Jeroen & de Haan, Jakob, 2009. "Central bank independence and financial instability," Journal of Financial Stability, Elsevier, vol. 5(4), pages 321-338, December.
  2. Peter Stella, 2005. "Central Bank Financial Strength, Transparency, and Policy Credibility," IMF Staff Papers, Palgrave Macmillan, vol. 52(2), pages 335-365, September.
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  4. Masciandaro, Donato & Quintyn, Marc & Taylor, Michael W., 2008. "Inside and outside the central bank: Independence and accountability in financial supervision: Trends and determinants," European Journal of Political Economy, Elsevier, vol. 24(4), pages 833-848, December.
  5. Paul Mizen, 2008. "The credit crunch of 2007-2008: a discussion of the background, market reactions, and policy responses," Review, Federal Reserve Bank of St. Louis, issue Sep, pages 531-568.
  6. Charles Goodhart, 2008. "The Regulatory Response to the Financial Crisis," FMG Special Papers sp177, Financial Markets Group.
  7. Kydland, Finn E & Prescott, Edward C, 1977. "Rules Rather Than Discretion: The Inconsistency of Optimal Plans," Journal of Political Economy, University of Chicago Press, vol. 85(3), pages 473-91, June.
  8. Douglas W. Diamond & Philip H. Dybvig, 2000. "Bank runs, deposit insurance, and liquidity," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Win, pages 14-23.
  9. White, William R., 2008. "Past financial crises, the current financial turmoil, and the need for a new macrofinancial stability framework," Journal of Financial Stability, Elsevier, vol. 4(4), pages 307-312, December.
  10. Jaromir Benes & Andrew Berg & Rafael A Portillo & David Vavra, 2013. "Modeling Sterilized Interventions and Balance Sheet Effects of Monetary Policy in a New-Keynesian Framework," IMF Working Papers 13/11, International Monetary Fund.
  11. Fischer, Karl-Hermann & Pfeil, Christian, 2003. "Regulation and Competition in German Banking: An Assessment," CFS Working Paper Series 2003/19, Center for Financial Studies (CFS).
  12. Masciandaro, Donato, 2009. "Politicians and financial supervision unification outside the central bank: Why do they do it?," Journal of Financial Stability, Elsevier, vol. 5(2), pages 124-146, June.
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Citations

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Cited by:
  1. Milcheva, Stanimira, 2013. "A bank lending channel or a credit supply shock?," Journal of Macroeconomics, Elsevier, vol. 37(C), pages 314-332.
  2. Emmanuel Carré & Jézabel Couppey-Soubeyran & Dominique Plihon & Marc Pourroy, 2013. "Central Banking after the Crisis: Brave New World or Back to the Future?," Documents de travail du Centre d'Economie de la Sorbonne 13073, Université Panthéon-Sorbonne (Paris 1), Centre d'Economie de la Sorbonne.
  3. Dieter Gramlich & Mikhail V. Oet & Stephen J. Ong, 2013. "Policy in adaptive financial markets—the use of systemic risk early warning tools," Working Paper 1309, Federal Reserve Bank of Cleveland.
  4. Monika Marcinkowska, 2013. "Regulation and self-regulation in banking: in search of optimum," Bank i Kredyt, National Bank of Poland, Economic Institute, vol. 44(2), pages 119-158.
  5. Nofsinger, John R., 2012. "Household behavior and boom/bust cycles," Journal of Financial Stability, Elsevier, vol. 8(3), pages 161-173.
  6. Berger, Wolfram & Kißmer, Friedrich, 2013. "Central bank independence and financial stability: A tale of perfect harmony?," European Journal of Political Economy, Elsevier, vol. 31(C), pages 109-118.
  7. Raviv, Alon & Sisli-Ciamarra, Elif, 2013. "Executive compensation, risk taking and the state of the economy," Journal of Financial Stability, Elsevier, vol. 9(1), pages 55-68.
  8. Zhang, Gaiyan & Zhang, Sanjian, 2013. "Information efficiency of the U.S. credit default swap market: Evidence from earnings surprises," Journal of Financial Stability, Elsevier, vol. 9(4), pages 720-730.
  9. Boyer, Pierre C. & Ponce, Jorge, 2012. "Regulatory capture and banking supervision reform," Journal of Financial Stability, Elsevier, vol. 8(3), pages 206-217.
  10. Emmanuel Carré & Jézabel Couppey-Soubeyran & Dominique Plihon & Marc Pourroy, 2013. "Central Banking after the Crisis: Brave New World or Back to the Future? Replies to a questionnaire sent to central bankers and economists," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) halshs-00881344, HAL.
  11. Nathalie Rey, 2012. "European States and Financial Systems: A Biased Relationship," Post-Print halshs-00758892, HAL.
  12. Ding, Cherng G. & Wu, Chiu-Hui & Chang, Pao-Long, 2013. "The influence of government intervention on the trajectory of bank performance during the global financial crisis: A comparative study among Asian economies," Journal of Financial Stability, Elsevier, vol. 9(4), pages 556-564.
  13. Arnone, Marco & Romelli, Davide, 2013. "Dynamic central bank independence indices and inflation rate: A new empirical exploration," Journal of Financial Stability, Elsevier, vol. 9(3), pages 385-398.

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