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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."

Suggested Citation

  • Cukierman, Alex, 2011. "Reflections on the crisis and on its lessons for regulatory reform and for central bank policies," Journal of Financial Stability, Elsevier, vol. 7(1), pages 26-37, January.
  • Handle: RePEc:eee:finsta:v:7:y:2011:i:1:p:26-37
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    Cited by:

    1. 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.
    2. Nitsche, Christin & Schröder, Michael, 2015. "Are SRI funds conventional funds in disguise or do they live up to their name?," ZEW Discussion Papers 15-027, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
    3. Nathalie Rey, 2012. "États et Systèmes financiers européens : une relation biaisée," Post-Print halshs-00697323, HAL.
    4. Wang, Li & Menkhoff, Lukas & Schröder, Michael & Xu, Xian, 2015. "Politicians' promotion incentives and bank risk exposure in China," Frankfurt School - Working Paper Series 216, Frankfurt School of Finance and Management.
    5. 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.
    6. 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.
    7. Raviv, Alon & Sisli-Ciamarra, Elif, 2013. "Executive compensation, risk taking and the state of the economy," Journal of Financial Stability, Elsevier, pages 55-68.
    8. Senderski, Marcin, 2012. "Self-regulation as a remedy for market turmoil: An over-the-counter or a prescription drug?," MPRA Paper 51328, University Library of Munich, Germany.
    9. Oet, Mikhail V. & Dooley, John & Gramlich, Dieter & Sarlin, Peter & Ong, Stephen J., 2015. "Evaluating the Information Value for Measures of Systemic Conditions," Working Paper 1513, Federal Reserve Bank of Cleveland.
    10. Zhang, Gaiyan & Zhang, Sanjian, 2013. "Information efficiency of the U.S. credit default swap market: Evidence from earnings surprises," Journal of Financial Stability, Elsevier, pages 720-730.
    11. Monika Marcinkowska, 2013. "Regulation and self-regulation in banking: in search of optimum," Bank i Kredyt, Narodowy Bank Polski, vol. 44(2), pages 119-158.
    12. Stanimira Milcheva, 2012. "Monetary policy, financial intermediation, current account and housing market - how do they fit together?," ERES eres2012_151, European Real Estate Society (ERES).
    13. Nofsinger, John R., 2012. "Household behavior and boom/bust cycles," Journal of Financial Stability, Elsevier, pages 161-173.
    14. Abudy, Menachem Meni & Raviv, Alon, 2016. "How much can illiquidity affect corporate debt yield spread?," Journal of Financial Stability, Elsevier, pages 58-69.
    15. 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.
    16. Nathalie Rey, 2012. "European States and Financial Systems: A Biased Relationship," Post-Print halshs-00758892, HAL.
    17. 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, pages 556-564.
    18. Boyer, Pierre C. & Ponce, Jorge, 2012. "Regulatory capture and banking supervision reform," Journal of Financial Stability, Elsevier, pages 206-217.
    19. Arnone, Marco & Romelli, Davide, 2013. "Dynamic central bank independence indices and inflation rate: A new empirical exploration," Journal of Financial Stability, Elsevier, pages 385-398.
    20. repec:hal:journl:halshs-00881344 is not listed on IDEAS
    21. Louise Parsons, 2013. "Developments in central banking after the GFC: central banks, the state, globalisation and the GFC," Chapters,in: Globalisation, the Global Financial Crisis and the State, chapter 10, pages 218-242 Edward Elgar Publishing.
    22. Milcheva, Stanimira, 2013. "A bank lending channel or a credit supply shock?," Journal of Macroeconomics, Elsevier, pages 314-332.
    23. Michael Diemer & Uwe Vollmer, 2015. "What makes banking crisis resolution difficult? Lessons from Japan and the Nordic Countries," Eurasian Economic Review, Springer;Eurasia Business and Economics Society, vol. 5(2), pages 251-277, December.

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