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Financial Regulation in a Changing World: Lessons from the Recent Crisis

The current crisis is leading many to re-think the role of finance and how it snew. This paper reviews what was regarded as the conventional wisdom on financial regulation prior to the 2007 onset of the crisis, briefly recounts some of the main factors behind the events of the 2007-09 years, and then turns to lessons for regulatory reform. At some point in the 1990s, the financial systems of high-income countries seemed to be functioning well and withstood some significant shocks, yet by 2007 much had changed. However, the regulatory structure did not change in response, and in fact eased in such a way as to exacerbate the instability that was subsequently experienced. A key theme is that financial regulation needs to be more dynamic, taking account of financial innovations and how they affect the sector. No such approach to regulation seems possible without greater accountability for regulators and attention to the incentives for those in the sector and for those who regulate it.

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File URL: http://web.williams.edu/Economics/wp/caprioregulation.pdf
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Paper provided by Department of Economics, Williams College in its series Department of Economics Working Papers with number 2009-05.

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Length: 31 pages
Date of creation: Sep 2009
Date of revision:
Handle: RePEc:wil:wileco:2009-05
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  1. Markus K. Brunnermeier, 2009. "Deciphering the Liquidity and Credit Crunch 2007-2008," Journal of Economic Perspectives, American Economic Association, vol. 23(1), pages 77-100, Winter.
  2. Rüdiger Fahlenbrach & René M. Stulz, 2009. "Bank CEO Incentives and the Credit Crisis," NBER Working Papers 15212, National Bureau of Economic Research, Inc.
  3. Levine, Ross, 1996. "Financial development and economic growth : views and agenda," Policy Research Working Paper Series 1678, The World Bank.
  4. Philippon, Thomas & Reshef, Ariell, 2009. "Wages and Human Capital in the U.S. Financial Industry: 1909-2006," CEPR Discussion Papers 7282, C.E.P.R. Discussion Papers.
  5. Gerard Caprio & Asli Demirgüç-Kunt & Edward Kane, 2008. "The 2007 Meltdown in Structured Securitization: Searching for Lessons not Scapegoats," Center for Development Economics 2008-03, Department of Economics, Williams College.
  6. Carmen M. Reinhart & Kenneth S. Rogoff, 2008. "This Time is Different: A Panoramic View of Eight Centuries of Financial Crises," NBER Working Papers 13882, National Bureau of Economic Research, Inc.
  7. Asli Demirg��-Kunt & Ross Levine, 2009. "Finance and Inequality: Theory and Evidence," Annual Review of Financial Economics, Annual Reviews, vol. 1(1), pages 287-318, November.
  8. Rocco Huang & Lev Ratnovski, 2009. "Why Are Canadian Banks More Resilient?," IMF Working Papers 09/152, International Monetary Fund.
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