Some Economics of Banking Reform
Where do we stand, five years on from the start of the crisis, on progress towards banking reform? Major advances have been made, but a lot of unfinished business remains, notably on structural reform of banks. Following a stock-take of current reform initiatives, the paper reviews some economics of public policy towards banks, starting with the rationale for deposit guarantees and lender-of-last-resort support but concentrating on why governments feel compelled to provide solvency support in crisis. It then covers the economics of capital requirements – and loss-absorbency more generally – and examines why such regulation is a better approach than taxation to address systemic risk externalities, and why the public interest requires much more capital than banks would choose. The role of structural regulation in making banking systems safer is then analysed, in particular forms of separation between retail and investment banking such as ring-fencing (as in current UK reforms) and complete separation (as in the US before the repeal of Glass-Steagall). The paper concludes with some reflections on the wider European policy debate in the light of the Liikanen Report on structural reform. A central theme of the analysis is that banking reform needs a well-designed combination of policies towards loss-absorbency and structural reform.
|Date of creation:||30 Nov 2012|
|Date of revision:|
|Contact details of provider:|| Postal: Manor Rd. Building, Oxford, OX1 3UQ|
Web page: http://www.economics.ox.ac.uk/
More information through EDIRC
References listed on IDEAS
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.:
- Douglas W. Diamond & Philip H. Dybvig, 2000.
"Bank runs, deposit insurance, and liquidity,"
Federal Reserve Bank of Minneapolis, issue Win, pages 14-23.
- Marcheggiano, Gilberto & Miles, David K & Yang, Jing, 2011.
"Optimal Bank Capital,"
CEPR Discussion Papers
8333, C.E.P.R. Discussion Papers.
When requesting a correction, please mention this item's handle: RePEc:oxf:wpaper:632. 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: (Monica Birds)
If references are entirely missing, you can add them using this form.