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Time to Set Banking Regulation Right

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  • Carmassi, Jacopo
  • Micossi, Stefano

Abstract

Excessive leverage and risk-taking by large international banks were the main causes of the 2008-09 financial crisis and the ensuing sharp drop in economic activity and employment. World leaders and central bankers promised that it would not happen again and, to this end, undertook to overhaul banking regulation, first and foremost by rectifying Basel prudential rules. This study argues that the new Basel III Accord and the ensuing EU Capital Requirements Directive IV fail to correct the two main shortcomings of international prudential rules: 1) reliance on banks’ risk management models for the calculation of capital requirements and 2) the lack of accountability by supervisors. Accordingly, the authors propose the calculation of capital requirements without risk adjustment and creation of a system of mandated action by supervisors modelled on the US framework of Prompt Corrective Action (PCA). They also recommend that banks should be required to issue large amounts of debentures that are convertible into equity in order to strengthen market discipline on management and shareholders.

Suggested Citation

  • Carmassi, Jacopo & Micossi, Stefano, 2012. "Time to Set Banking Regulation Right," CEPS Papers 6734, Centre for European Policy Studies.
  • Handle: RePEc:eps:cepswp:6734
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    File URL: http://www.ceps.eu/system/files/book/2012/03/Time%20to%20Set%20Banking%20Regulation%20Right.pdf
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    References listed on IDEAS

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    1. J. Tobin, 1958. "Liquidity Preference as Behavior Towards Risk," Review of Economic Studies, Oxford University Press, vol. 25(2), pages 65-86.
    2. João A. C. Santos, 2000. "Bank capital regulation in contemporary banking theory: a review of the literature," BIS Working Papers 90, Bank for International Settlements.
    3. Mr. Francis Vitek & Mr. Scott Roger, 2012. "The Global Macroeconomic Costs of Raising Bank Capital Adequacy Requirements," IMF Working Papers 2012/044, International Monetary Fund.
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    Citations

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    Cited by:

    1. Ioana Laura VALEANU, 2015. "A New Approach To Financial Regulation At The European Level," CES Working Papers, Centre for European Studies, Alexandru Ioan Cuza University, vol. 7(4), pages 901-913, December.
    2. Paolo Angelini & Sergio Nicoletti-Altimari & Ignazio Visco, 2012. "Macroprudential, microprudential and monetary policies: conflicts, complementarities and trade-offs," Questioni di Economia e Finanza (Occasional Papers) 140, Bank of Italy, Economic Research and International Relations Area.
    3. Carmassi, Jacopo & Di Noia, Carmine & Micossi, Stefano, 2012. "Banking Union: A federal model for the European Union with prompt corrective action," CEPS Papers 7308, Centre for European Policy Studies.
    4. Stefano Micossi, 2012. "Banking Union in the Making," CESifo Forum, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 13(4), pages 21-25, December.
    5. Carlo D'Ippoliti, 2012. "Josef Steindl: Introduzione: sulle cause reali della crisi finanziaria (Introduction: on the real causes of the financial crisis)," Moneta e Credito, Economia civile, vol. 65(260), pages 279-292.
    6. Sharma, Priyanka & Wagman, Liad, 2020. "Advertising and Voter Data in Asymmetric Political Contests," Information Economics and Policy, Elsevier, vol. 52(C).
    7. Stefano Micossi, 2012. "Banking Union in the Making," CESifo Forum, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 13(04), pages 21-25, December.
    8. Micossi,Stefano, 2013. "A Viable Alternative to Basel III Prudential Capital Rules," CEPS Papers 8075, Centre for European Policy Studies.
    9. Mario Tonveronachi & Elisabetta Montanaro, 2012. "Financial re-regulation at a crossroads: How the European experience strengthens the case for a radical reform built on Minsky's approach," PSL Quarterly Review, Economia civile, vol. 65(263), pages 335-383.
    10. Paolo Angelini & Sergio Nicoletti-Altimari & Ignazio Visco, 2013. "Macroprudential, Microprudential and Monetary Policies: Policies, Complementarities and Trade-Offs," Chapters, in: Andreas Dombret & Otto Lucius (ed.), Stability of the Financial System, chapter 22, Edward Elgar Publishing.
    11. Micossi, Stefano & Bruzzone, Ginevra & Carmassi, Jacopo, 2013. "The New European Framework for Managing Bank Crises," CEPS Papers 8620, Centre for European Policy Studies.

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