Time to set banking regulation right

Jihad Dagher, Ning Fu, 26 June 2012Ever since the recent mortgage crisis, calls for tighter regulation on lenders have been widespread. But would stricter supervision and regulation of lenders have been any use during the frenzied optimism of a boom? This column argues that it might.

Ralph De Haas, Neeltje van Horen, 25 August 2010The subprime crisis and subsequent global crisis have brought bank finances firmly to public attention, with many calling for stronger regulation. This column argues that the subprime crisis offered a “wake-up call” for banks, prompting them to screen and monitor their corporate borrowers more carefully without the need for more regulation.

Charles A.E. Goodhart, Udara Peiris, Dimitri Tsomocos, Alexandros Vardoulakis, 18 February 2010The global financial crisis has led many to propose regulatory measures that will reduce the idiosyncratic and systemic risk of banks.

Paul Krugman’s wrap-up of the Minsky Conference on financial panics ends with a mention of Gary Gorton’s cartel hypothesis that banking got too competitive:

Galo Nuño, Carlos Thomas, 12 March 2013Economists tend to agree that explosive deleveraging in the banking sector was a central element of the 2008 global financial crisis. This column argues that such deleveraging is far from unique. In fact, there is a ‘bank leverage cycle’ in which bank leverage, assets and GDP ramp up and down together; and this is true across financial subsectors. Such procyclicality strengthens the case for macroprudential regulations.Full Article: Bank leverage cycles

Enrico Perotti, Lev Ratnovski, Razvan Vlahu, 26 August 2011As leading economists in Jackson Hole and Lindau call for more and better regulation to avoid a repeat global crisis, this column argues that higher bank capital, while essential, will be no panacea. In particular, it shows that tail risk often goes unaddressed. Regulators should therefore adopt direct tools for dealing with tail risk, including limits on asset and liability-side risk exposures.Full Article: More bank capital is not enough

Claudio Raddatz, 15 March 2010How did a seemingly small shock to the US financial markets manage to spread so far, so quickly? This column argues that the heavy reliance on short-term wholesale funding is to blame. It follows that the discussions of regulatory reform should focus on the risks associated with the liability structure of banks.Full Article: How bank credit-market funding helped spread the global crisis

Luis Garicano, John Van Reenen, 4 May 2010How can financial regulation be fixed to avoid another global crisis? This column argues that the “heads, I win; tails, society loses” moral hazard in the financial sector has to stop. To do this, policymakers must make bankruptcy credible. If a company has too much debt and becomes insolvent, it should suspend payments and its shareholders and creditors should lose their money.Full Article: Financial regulation: Can we avoid another great recession?