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Why Prudential Regulation Will Fail to Prevent Financial Crises. A Legal Approach

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  • Marcelo Madureira Prates

Abstract

In this paper, we suggest that the regulation of the financial system, especially if the aim is to prevent financial crises, should be focused on dealing with the consequences of the crises, not on trying to avoid their causes, although it may seem counterintuitive at first sight. Contrary to the majority of opinions in the field, we firmly believe that more important than organizing the best possible prudential regulation is having a solid and well-developed financial safety net. Building a strong safety net might not only boost confidence in the financial system and contribute to its stability, but also create the right incentives to avoid reckless risk-taking, mainly if there are rules establishing that other financial institutions, creditors and even executives could be held responsible for the trouble caused by any failed financial institution.

Suggested Citation

  • Marcelo Madureira Prates, 2013. "Why Prudential Regulation Will Fail to Prevent Financial Crises. A Legal Approach," Working Papers Series 335, Central Bank of Brazil, Research Department.
    • Handle: RePEc:bcb:wpaper:335
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    File URL: https://www.bcb.gov.br/content/publicacoes/WorkingPaperSeries/wps335.pdf
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    References listed on IDEAS

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    1. Carmen M. Reinhart & Kenneth S. Rogoff, 2009. "Varieties of Crises and Their Dates," Introductory Chapters, in: This Time Is Different: Eight Centuries of Financial Folly, Princeton University Press.
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    3. repec:rnp:ecopol:09111 is not listed on IDEAS
    4. World Bank, 2012. "World Development Report 2013 [Rapport sur le développement dans le monde 2013]," World Bank Publications - Books, The World Bank Group, number 11843, April.
    5. World Bank, 2012. "Global Financial Development Report 2013 : Rethinking the Role of the State in Finance," World Bank Publications - Books, The World Bank Group, number 11848, April.
    6. James Crotty, 2009. "Structural causes of the global financial crisis: a critical assessment of the 'new financial architecture'," Cambridge Journal of Economics, Cambridge Political Economy Society, vol. 33(4), pages 563-580, July.
    7. Black, Julia, 2002. "Critical reflections on regulation," LSE Research Online Documents on Economics 35985, London School of Economics and Political Science, LSE Library.
    8. World Bank, 2012. "World Development Report 2012 [Rapport sur le développement dans le monde 2012]," World Bank Publications - Books, The World Bank Group, number 4391, April.
    9. Schoenmaker, Dirk & Gros, Daniel, 2012. "A European Deposit Insurance and Resolution Fund," CEPS Papers 6918, Centre for European Policy Studies.
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