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How Financial Innovation Might Cancel Out Bank Regulation Along Financial Cycles. A Keynes’s State of Confidence Interpretation

  • Konstantinos I. Loizos

    ()

    (University of Athens)

The question posed in this paper is how financial innovation may render conventional bank regulation ineffective. It is argued that the root cause as well as the essence of financial innovation is the predominance of trust in the financial markets, as it is confidence in the financial markets which makes the acceptance of financial innovation possible. In particular, mutual trust in the interbank market depends on the degree of confidence by which expectations are held, which, in turn, affects the relevant risk premia. Consequently, bank regulation may fail to accomplish its stabilization purpose if it cannot check overconfidence in the upswing or inspire and redress lack of confidence in the downturn.

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File URL: http://www.postkeynesian.net/downloads/wpaper/PKWP1403.pdf
File Function: First version, 2014
Download Restriction: no

Paper provided by Post Keynesian Economics Study Group (PKSG) in its series Working Papers with number PKWP1403.

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Length: 33 pages
Date of creation: Feb 2014
Date of revision:
Handle: RePEc:pke:wpaper:pkwp1403
Contact details of provider: Web page: http://www.postkeynesian.net

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  1. Xavier Freixas & Jean-Charles Rochet, 1997. "Microeconomics of Banking," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262061937, June.
  2. Charles W. Calomiris, 2009. "Financial Innovation, Regulation, and Reform," Cato Journal, Cato Journal, Cato Institute, vol. 29(1), pages 65-91, Winter.
  3. L. Randall Wray, 2009. "The rise and fall of money manager capitalism: a Minskian approach," Cambridge Journal of Economics, Oxford University Press, vol. 33(4), pages 807-828, July.
  4. James Crotty, 2008. "Structural Causes of the Global Financial Crisis: A Critical Assessment of the ‘New Financial Architecture’," Working Papers wp180, Political Economy Research Institute, University of Massachusetts at Amherst.
  5. David Dequech, 1999. "Expectations and Confidence under Uncertainty," Journal of Post Keynesian Economics, M.E. Sharpe, Inc., vol. 21(3), pages 415-430, April.
  6. David Dequech, 2005. "Confidence and alternative Keynesian methods of asset choice," Review of Political Economy, Taylor & Francis Journals, vol. 17(4), pages 533-547.
  7. Heid, Frank, 2007. "The cyclical effects of the Basel II capital requirements," Journal of Banking & Finance, Elsevier, vol. 31(12), pages 3885-3900, December.
  8. Éric Tymoigne, 2011. "Measuring Macroprudential Risk: Financial Fragility Indexes," Economics Working Paper Archive wp_654, Levy Economics Institute.
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