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A regulatory regime for financial stability

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    Abstract

    As bank failures clearly involve avoidable costs, there is a welfare benefit to be derived from lowering their probability and reducing the cost of those that do occur. The paper suggests a paradigm for enhanced financial stability. A central theme is that, what are often viewed as alternatives, are in fact complements within an overall regulatory strategy. The discussion is set within the context of what is termed a regulatory regime which is wider than the rules and monitoring conducted by regulatory agencies. Just as the causes of banking crises are multi-dimensional, so the principles of an effective regulatory regime also need to incorporate a wider range of issues than externally imposed rules on bank behaviour. The key components of the regime are: (1) the rules established by regulatory agencies; (2) monitoring and supervision by official agencies; (3) the incentive structures faced by regulatory agencies, consumers and banks; (4) the role of market discipline and monitoring; (5) intervention arrangements in the event of bank failures; (6) the role of internal corporate governance arrangements within banks, and (7) the disciplining and accountability arrangements applied to regulatory agencies. The central theme is that the components of the regulatory regime need to be combined in an overall regulatory strategy, and that while all are necessary, none alone are sufficient. The objective is to optimise a regulatory strategy by combining the components of the regime, bearing in mind that negative trade-offs may be encountered. Thus, if regulation is badly constructed or taken too far, there may be negative impacts on other components to the extent that the overall effect is diluted. The paper also argues that the optimum mix of the components of the regime will vary between countries, over time for all countries, and between banks. The proposed New Basel Capital Accord is discussed in terms of the regulatory regime paradigm.

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    Bibliographic Info

    Paper provided by Oesterreichische Nationalbank (Austrian Central Bank) in its series Working Papers with number 48.

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    Date of creation: 27 Jul 2001
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    Handle: RePEc:onb:oenbwp:48

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    1. Timothy D. Lane, 1993. "Market Discipline," IMF Staff Papers, Palgrave Macmillan, vol. 40(1), pages 53-88, March.
    2. Douglas D. Evanoff & Larry D. Wall, 2000. "Subordinated debt and bank capital reform," Working Paper 2000-24, Federal Reserve Bank of Atlanta.
    3. Kane, Edward J., 2001. "Dynamic inconsistency of capital forbearance: Long-run vs. short-run effects of too-big-to-fail policymaking," Pacific-Basin Finance Journal, Elsevier, vol. 9(4), pages 281-299, August.
    4. Mathias Dewatripont & Jean Tirole, 1994. "The prudential regulation of banks," ULB Institutional Repository 2013/9539, ULB -- Universite Libre de Bruxelles.
    5. Richard Brealey, 1999. "The Asian Crisis: Lessons For Crisis Management And Prevention," Journal of Applied Corporate Finance, Morgan Stanley, vol. 12(3), pages 111-124.
    6. Hoggarth, Glenn & Reis, Ricardo & Saporta, Victoria, 2002. "Costs of banking system instability: Some empirical evidence," Journal of Banking & Finance, Elsevier, vol. 26(5), pages 825-855, May.
    7. Brealey, Richard, 1999. "The Asian Crisis: Lessons for Crisis Management and Prevention," International Finance, Wiley Blackwell, vol. 2(2), pages 249-72, July.
    8. Paul H. Kupiec & James M. O'Brien, 1997. "The pre-commitment approach: using incentives to set market risk capital requirements," Finance and Economics Discussion Series 1997-14, Board of Governors of the Federal Reserve System (U.S.).
    9. Jokivuolle, Esa & Kauko, Karlo, 2001. "The New Basel Accord: some potential implications of the new standards for credit risk," Research Discussion Papers 2/2001, Bank of Finland.
    10. Asli Demirgüç-Kunt & Enrica Detragiache, 1997. "The Determinants of Banking Crises," IMF Working Papers 97/106, International Monetary Fund.
    11. Arturo Estrella, 1998. "Formulas or supervision? Remarks on the future of regulatory capital," Economic Policy Review, Federal Reserve Bank of New York, issue Oct, pages 191-200.
    12. Glaessner, Thomas & Mas, Ignacio, 1995. "Incentives and the Resolution of Bank Distress," World Bank Research Observer, World Bank Group, vol. 10(1), pages 53-73, February.
    13. Robert R. Bliss & Mark J. Flannery, 2000. "Market discipline in the governance of U.S. Bank Holding Companies: monitoring vs. influencing," Working Paper Series WP-00-3, Federal Reserve Bank of Chicago.
    14. repec:fth:bfdipa:2/2001 is not listed on IDEAS
    15. Caprio Jr., Gerard, 1997. "Safe and sound banking in developing countries : we're not in Kansas anymore," Policy Research Working Paper Series 1739, The World Bank.
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    Cited by:
    1. Schüler, Martin, 2003. "Incentive Problems in Banking Supervision: The European Case," ZEW Discussion Papers 03-62, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
    2. Saibal Ghosh & Abhiman Das, 2004. "Market Discipline in Indian Bank: Does the Data Tell a Story," Industrial Organization 0411005, EconWPA.
    3. Kalina Dimitrova & Nikolay Nenovsky, 2003. "Assurance des dépôts bancaires durant l’accession à l’UE," Revue d'Économie Financière, Programme National Persée, vol. 72(3), pages 123-140.
    4. International Monetary Fund, 2004. "Toward a Framework for Safeguarding Financial Stability," IMF Working Papers 04/101, International Monetary Fund.
    5. Nikolay Nenovsky & Kalina Dimitrova, 2003. "Deposit Insurance During EU Accession," William Davidson Institute Working Papers Series 2003-617, William Davidson Institute at the University of Michigan.
    6. Abhiman Das & Saibal Ghosh, 2004. "Market Discipline In The Indian Banking Sector: An Empirical Exploration," Finance 0410020, EconWPA.

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