The Foundationsof Banks' Risk Regulation: A Review of Literature

The stability of the banking industry around the world has been observed as periodical since the Great Depression. Financial markets have changed dramatically over the last twenty-five years, introducing more competition for and from banks. Banks are the financial institutions responsible for providing liquidity to the economy. This responsibility is, however, the main cause of their fragility. In 1988, the G10 modified banking regulation significantly by setting capital standards for banks. These standards have now been adopted by more than one hundred countries as part of their national regulation of banks’ risk. Consequently, it might be appropriate to continue developing national regulation based on optimal deposit insurance and to keep searching for other optimal complementary instruments against systemic risk. The central bank should be responsible for aggregate liquidity. Confidence in the financial sector is a public good that must be ensured by the government. Who should be in charge: the central bank or a regulatory agency? The revised literature seems to say that this role should be taken by a regulatory agency independent from the central bank and independent from the political power.(This abstract was borrowed from another version of this item.)