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Time to Set Banking Regulation Right

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  • Carmassi, Jacopo
  • Micossi, Stefano
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    Abstract

    Excessive leverage and risk-taking by large international banks were the main causes of the 2008-09 financial crisis and the ensuing sharp drop in economic activity and employment. World leaders and central bankers promised that it would not happen again and, to this end, undertook to overhaul banking regulation, first and foremost by rectifying Basel prudential rules. This study argues that the new Basel III Accord and the ensuing EU Capital Requirements Directive IV fail to correct the two main shortcomings of international prudential rules: 1) reliance on banks’ risk management models for the calculation of capital requirements and 2) the lack of accountability by supervisors. Accordingly, the authors propose the calculation of capital requirements without risk adjustment and creation of a system of mandated action by supervisors modelled on the US framework of Prompt Corrective Action (PCA). They also recommend that banks should be required to issue large amounts of debentures that are convertible into equity in order to strengthen market discipline on management and shareholders.

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    File URL: http://www.ceps.eu/system/files/book/2012/03/Time%20to%20Set%20Banking%20Regulation%20Right.pdf
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    Bibliographic Info

    Paper provided by Centre for European Policy Studies in its series CEPS Papers with number 6734.

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    Length: 80 pages
    Date of creation: Mar 2012
    Date of revision:
    Handle: RePEc:eps:cepswp:6734

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    References

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    Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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    1. Francis Vitek & Scott Roger, 2012. "The Global Macroeconomic Costs of Raising Bank Capital Adequacy Requirements," IMF Working Papers 12/44, International Monetary Fund.
    2. João A. C. Santos, 2000. "Bank capital regulation in contemporary banking theory: a review of the literature," BIS Working Papers 90, Bank for International Settlements.
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    Citations

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    Cited by:
    1. Micossi,Stefano, 2013. "A Viable Alternative to Basel III Prudential Capital Rules," CEPS Papers 8075, Centre for European Policy Studies.
    2. Paolo Angelini & Sergio Nicoletti-Altimari & Ignazio Visco, 2012. "Macroprudential, microprudential and monetary policies: conflicts, complementarities and trade-offs," Questioni di Economia e Finanza (Occasional Papers) 140, Bank of Italy, Economic Research and International Relations Area.
    3. Mario Tonveronachi & Elisabetta Montanaro, 2012. "Financial re-regulation at a crossroads: How the European experience strengthens the case for a radical reform built on Minsky's approach," PSL Quarterly Review, Economia civile, vol. 65(263), pages 335-383.
    4. Stefano Micossi, 2012. "Banking Union in the Making," CESifo Forum, Ifo Institute for Economic Research at the University of Munich, vol. 13(4), pages 21-25, December.
    5. Carlo D'Ippoliti, 2012. "Josef Steindl: Introduzione: sulle cause reali della crisi finanziaria (Introduction: on the real causes of the financial crisis)," Moneta e Credito, Economia civile, vol. 65(260), pages 279-292.
    6. Carmassi, Jacopo & Di Noia, Carmine & Micossi, Stefano, 2012. "Banking Union: A federal model for the European Union with prompt corrective action," CEPS Papers 7308, Centre for European Policy Studies.
    7. Micossi, Stefano & Bruzzone, Ginevra & Carmassi, Jacopo, 2013. "The New European Framework for Managing Bank Crises," CEPS Papers 8620, Centre for European Policy Studies.

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