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Rethinking financial regulation

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  • Thomas M. Hoenig

Abstract

In recent years, revolutionary changes in financial markets, combined with incidents such as Barings and Daiwa, have revived concerns about the adequacy of financial regulation. Historically, financial regulatory policy has been driven by the view that to maintain the health of the financial system you must maintain the health of individual institutions.> In light of ongoing changes in financial markets, however, extending the traditional approach to financial market regulation may not work. Extending the traditional approach may be too costly and difficult, especially for large, globally active institutions, because of the complexities of many new activities and financial instruments. Given these difficulties, it seems appropriate to ask whether there is an alternative regulatory approach to promoting financial stability and protecting government safety nets without sacrificing efficiency or stifling innovation.> In an article based on comments made at the annual World Economic Forum in Davos, Switzerland, Mr. Hoenig provides some thoughts on possible alternatives. First, instead of regulating to make institutions fail-safe, an alternative approach would be to strengthen the stability of the financial system by designing procedures that prevent large interbank exposures in the payments system and interbank deposits. Second, although moral hazard problems can be contained through traditional regulatory approaches, an alternative would be to require those institutions that engage in an expanding array of complex activities to give up direct access to government safety nets in return for reduced regulation and oversight.

Suggested Citation

  • Thomas M. Hoenig, 1996. "Rethinking financial regulation," Economic Review, Federal Reserve Bank of Kansas City, issue Q II, pages 5-13.
  • Handle: RePEc:fip:fedker:y:1996:i:qii:p:5-13:n:v.81no.2
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    File URL: http://www.kansascityfed.org/publicat/econrev/pdf/2q96hoen.pdf
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    References listed on IDEAS

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    1. Paul S. Calem, 1993. "The proconsumer argument for interstate branching," Business Review, Federal Reserve Bank of Philadelphia, issue May, pages 15-29.
    2. Berger, Allen N. & Hunter, William C. & Timme, Stephen G., 1993. "The efficiency of financial institutions: A review and preview of research past, present and future," Journal of Banking & Finance, Elsevier, vol. 17(2-3), pages 221-249, April.
    3. Sherrill Shaffer, 1994. "Bank competition in concentrated markets," Business Review, Federal Reserve Bank of Philadelphia, issue Mar, pages 3-16.
    4. David G. Holdsworth, 1993. "Is consolidation compatible with competition? The New York and New Jersey experience," Research Paper 9306, Federal Reserve Bank of New York.
    5. Frederick T. Furlong & Gary C. Zimmerman, 1995. "Consolidation: California style," FRBSF Economic Letter, Federal Reserve Bank of San Francisco, issue oct27.
    6. Hannan, Timothy H. & Liang, J. Nellie, 1993. "Inferring market power from time-series data : The case of the banking firm," International Journal of Industrial Organization, Elsevier, vol. 11(2), pages 205-218, June.
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    Cited by:

    1. Lee, B.C. & Longe-Akindemowo, O., 1998. "Regulatory Issues in Electronic Money: A Legal-Economics Analysis," Economics Working Papers wp98-02, School of Economics, University of Wollongong, NSW, Australia.
    2. Lütz, Susanne, 1998. "Wenn Banken sich vergessen ...: Risikoregulierung im internationalen Mehr-Ebenen-System," MPIfG Discussion Paper 98/5, Max Planck Institute for the Study of Societies.
    3. Knorr Andreas, 1999. "Staatliche Bankenaufsicht – eine effiziente Institution?," ORDO. Jahrbuch für die Ordnung von Wirtschaft und Gesellschaft, De Gruyter, vol. 50(1), pages 345-370, January.
    4. Stern, Gary H., 1998. "Government safety nets, banking system stability, and economic development," Journal of Asian Economics, Elsevier, vol. 9(1), pages 21-29.

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