On the paradox of prudential regulations in the globalized economy; International reserves and the crisis: a reassessment
This paper discusses two pertinent policy issues dealing with the global liquidity crisis - global prudential regulation reform, and reassessment of using international reserves in the crisis. We point out the paradox of prudential regulations â€“ while the identity of economic actors that benefited directly from crises avoidance is unknown, the cost and the cumbrance of regulations are transparent. Hence, crises that had been avoided are imperceptible and are underrepresented in the political discourse, and the demand for prudential regulations declines during prolonged good times, thereby increasing the ultimate cost of eventual crises. While the seeds of the present crisis were mostly home grown, international flows of capital magnified its costs. Global financial integration produces the by-product of â€œregulatory arbitrageâ€ â€“ capital tends to flow to underregulated countries, frequently resulting in excessive risk taking, in anticipation of future bailout. Dealing with â€œregulatory arbitrageâ€ requires coordinated prudential regulations that should apply as equally as possible to domestic and foreign players. A coordinated globalized prudential regulation, by increasing the cost of prudential deregulation, would mitigate the temptation to under-regulate during prolonged good-times, thus adding a side benefit. We also analyze the different approaches to the use of reserves during the crisis and what this means for the global financial system. The deleveraging triggered by the crisis implies that countries that hoarded reserves have been reaping the benefits. The crisis illustrates the importance of the self insurance provided by reserves, as well as the usefulness of policies that channel a share of the windfall gains associated with improvements in the terms-of-trade to reserves and sovereign wealth funds. The reluctance of many developing countries to draw down on their reserve holdings raises the possibility that they may now suffer less from the â€œfear of floatingâ€ than from a â€œfear of losing international reservesâ€ , which may signal deterioration in the credit worthiness of a country. While the selective swap lines offered by the FED to several EMs help, it falls short of dealing with the fear of losing reserves. Mitigating this concern should be the prime responsibility of the international financial institutions.
|Date of creation:||01 Feb 2009|
|Date of revision:|
|Contact details of provider:|| Postal: Santa Cruz, CA 95064|
Phone: (831) 459-2743
Fax: (831) 459-5077
Web page: http://www.escholarship.org/repec/ucscecon/
More information through EDIRC
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.:
- Joshua Aizenman, 2008.
"Large Hoarding Of International Reserves And The Emerging Global Economic Architecture,"
University of Manchester, vol. 76(5), pages 487-503, 09.
- Joshua Aizenman, 2007. "Large Hoarding of International Reserves and the Emerging Global Economic Architecture," NBER Working Papers 13277, National Bureau of Economic Research, Inc.
- Joshua Aizenman & Menzie D. Chinn & Hiro Ito, 2008.
"Assessing the Emerging Global Financial Architecture: Measuring the Trilemma's Configurations over Time,"
NBER Working Papers
14533, National Bureau of Economic Research, Inc.
- Aizenman, Joshua & Chinn, Menzie David & Ito, Hiro, 2009. "Assessing the Emerging Global Financial Architecture: Measuring the Trilemma's Configurations over Time," Santa Cruz Department of Economics, Working Paper Series qt840728sc, Department of Economics, UC Santa Cruz.
- Maurice Obstfeld & Jay C. Shambaugh & Alan M. Taylor, 2008.
"Financial Stability, the Trilemma, and International Reserves,"
NBER Working Papers
14217, National Bureau of Economic Research, Inc.
- Maurice Obstfeld & Jay C. Shambaugh & Alan M. Taylor, 2010. "Financial Stability, the Trilemma, and International Reserves," American Economic Journal: Macroeconomics, American Economic Association, vol. 2(2), pages 57-94, April.
- Obstfeld, Maurice & Shambaugh, Jay C & Taylor, Alan M., 2008. "Financial Stability, the Trilemma, and International Reserves," CEPR Discussion Papers 6693, C.E.P.R. Discussion Papers.
- Joshua Aizenman & Reuven Glick, 2008.
"Sovereign Wealth Funds: Stylized Facts about their Determinants and Governance,"
NBER Working Papers
14562, National Bureau of Economic Research, Inc.
- Joshua Aizenman & Reuven Glick, 2009. "Sovereign Wealth Funds: Stylized Facts about their Determinants and Governance," International Finance, Wiley Blackwell, vol. 12(3), pages 351-386, December.
- Aizenman, Joshua & Glick, Reuven, 2008. "Sovereign Wealth Funds: Stylized Facts about their Determinants and Governance," Santa Cruz Department of Economics, Working Paper Series qt1fj4b203, Department of Economics, UC Santa Cruz.
- Joshua Aizenman & Reuven Glick, 2008. "Sovereign wealth funds: stylized facts about their determinants and governance," Working Paper Series 2008-33, Federal Reserve Bank of San Francisco.
When requesting a correction, please mention this item's handle: RePEc:cdl:ucscec:qt5hx2x2kj. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Lisa Schiff)
If references are entirely missing, you can add them using this form.