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Financial Regulation After the Crisis:How Did We Get Here, and How Do We Get Out?

Listed author(s):
  • Gerard Caprio, Jr.

Following the crisis of 2007, regulatory authorities either are or should be engaging in a fundamental reconsideration of how they approach financial regulation and supervision. This paper briefly summarizes the present international consensus on regulation as embodied in the Basel framework, looks at how we came to be in such a situation, and proposes a re-start of the process that has been organized by the Basel Committee on Bank Supervision. It reviews the flaws of that framework and concludes that its weaknesses are fundamental, in its neglect of the endogeneity of risk to the regulatory structure, and of the dynamic nature of finance, and thus of its regulation as well. Neither a static rulebook, nor an ever increasingly complex one, will ever provide financial safety and soundness. Specific recommendations are made, starting with an abandonment of risk weights and the adoption of a simple leverage rule, supplemented by CoCos, and some simple rules. More radically, a different approach is urged, one that focuses on the oversight and accountability of regulators and greater transparency, both of banks and of the regulatory process.

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File URL: http://www.lse.ac.uk/fmg/workingPapers/specialPapers/PDF/SP226.pdf
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Paper provided by Financial Markets Group in its series FMG Special Papers with number sp226.

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Date of creation: 2013
Handle: RePEc:fmg:fmgsps:sp226
Contact details of provider: Web page: http://www.lse.ac.uk/fmg/

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  1. George A. Akerlof & Paul M. Romer, 1993. "Looting: The Economic Underworld of Bankruptcy for Profit," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 24(2), pages 1-74.
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  3. Claessens, Stijn & Ghosh, Swati R. & Mihet, Roxana, 2013. "Macro-prudential policies to mitigate financial system vulnerabilities," Journal of International Money and Finance, Elsevier, vol. 39(C), pages 153-185.
  4. Fahlenbrach, Rüdiger & Stulz, René M., 2011. "Bank CEO incentives and the credit crisis," Journal of Financial Economics, Elsevier, vol. 99(1), pages 11-26, January.
  5. Koehn, Michael & Santomero, Anthony M, 1980. " Regulation of Bank Capital and Portfolio Risk," Journal of Finance, American Finance Association, vol. 35(5), pages 1235-1244, December.
  6. Lane, Philip R., 2003. "The cyclical behaviour of fiscal policy: evidence from the OECD," Journal of Public Economics, Elsevier, vol. 87(12), pages 2661-2675, December.
  7. Kane, Edward J, 1981. "Accelerating Inflation, Technological Innovation, and the Decreasing Effectiveness of Banking Regulation," Journal of Finance, American Finance Association, vol. 36(2), pages 355-367, May.
  8. Buser, Stephen A & Chen, Andrew H & Kane, Edward J, 1981. "Federal Deposit Insurance, Regulatory Policy, and Optimal Bank Capital," Journal of Finance, American Finance Association, vol. 36(1), pages 51-60, March.
  9. Con Keating & Hyun Song Shin & Charles Goodhart & Jon Danielsson, 2001. "An Academic Response to Basel II," FMG Special Papers sp130, Financial Markets Group.
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