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Financial stability is one of the key tenets of a central bank’s functions. Since the financial crisis of 2007-2009, an area of hot debate is the extent to which the central bank should be involved with prudential regulation. This book examines the macro and micro-prudential regulatory frameworks and systems of the United Kingdom, Australia, the United States, Canada and Germany. Drawing on the regulator frameworks of these regions, this book examines the central banks’ roles of crisis management, resolution and prudential regulation. Alison Lui compares the institutional structure of the new ‘twin-peaks’ model in the UK to the Australian model, and the multi-regulatory US model and the single regulatory Canadian model. The book also discusses the extent the central bank in these countries, as well as the ECB, are involved with financial stability, and argues that the institutional architecture and geographical closeness of the Bank of England and Financial Policy Committee give rise to the fear that the UK central bank may become another single super-regulator, which may provide the Bank of England with too much power. As a multi-regional, comparative study on the importance and effectiveness of prudential regulation, this book will be of great use and interest to students and researchers in finance and bank law, economics and banking.
The Great Financial Crisis of 2007-2010 exposed the existence of significant imperfections in the financial regulatory framework that encouraged excessive risk-taking and increased system vulnerabilities. The resulting high cost of the crisis in terms of lost aggregate income and wealth, and increased unemployment has reinforced the need to improve financial stability within and across countries via changes in traditional microprudential regulation, as well as the introduction of new macroprudential regulations. Amongst the questions raised are:
We consider the optimality of various institutional arrangements for agencies that conduct macro-prudential regulation and monetary policy. When a central bank is in charge of price and financial stability, a new time inconsistency problem may arise. Ex-ante, the central bank chooses the socially optimal level of inflation. Ex-post, however, the central bank chooses inflation above the social optimum to reduce the real value of private debt. This inefficient outcome arises when macro-prudential policies cannot be adjusted as frequently as monetary. Importantly, this result arises even when the central bank is politically independent. We then consider the role of political pressures in the spirit of Barro and Gordon (1983). We show that if either the macro-prudential regulator or the central bank (or both) are not politically independent, separation of price and financial stability objectives does not deliver the social optimum.
Since banking systems play a crucial role in maintaining the overall health of the economy, the adverse effects of poorly supervised systems may be quite severe. Without some form of vigilant external oversight, banking systems could fall prey to excessive risk taking, moral hazard, and corruption. Prudential supervision provides that oversight, using government regulation and monitoring to ensure the soundness of the banking system and, by extension, the economy at large. The contributors to this thoughtful volume examine the current state of prudential supervision, focusing on fundamental issues and key pragmatic concerns. Why is prudential supervision so important? What kinds of excess must it guard against? What particular forms does it take? Which of these are the most effective deterrents against mismanagement and system overload in today's rapidly shifting financial climate? The contributors foresee a continued movement beyond simple regulatory rules in banking and toward a more active evaluation and supervision of a bank's risk management practices.
The financial crises of the past have proven that prudent and effective systems of bank regulation are crucial in preserving and maintaining a resilient financial system. Banks play a significant role in the economic environment and their stability and soundness is imperative to prevent financial crises. Changes in the market and developments in banking practices have increased the risk exposures of banks. Through the contagion effect, the failure of one bank may have far-reaching consequences for other banks and the financial system as a whole. Essentially, enhanced and effective banking regulation is pertinent to safeguard the financial system. As a regulatory response to these financial crises, capital and liquidity requirements of banks have been developed and adopted internationally, over the years, with the purpose to preserve the integrity of the global financial system. These frameworks of international banking regulation have been adopted through the Basel Accords, which are premised on strengthening the resilience of banks to withstand financial pressures. The 2008 Global Financial Crisis prompted the need to revise the previous regulatory instruments, resulting in the introduction of the latest international regulatory framework known as Basel Ill. In South Africa, these international standards of banking regulation have been transposed into the relevant legislative instruments regulating banks in a proactive effort to enhance and preserve the stability of banks. This dissertation discusses the aspect of bank regulation and how prudential regulation, as a regulatory tool, contributes to the promotion of financial stability. The study critically discusses the capital and liquidity requirements of banks as set out in the Basel Accords and analyses their ability, as mechanisms of prudential regulation, to preserve a resilient financial system. The dissertation further considers how these international standards of banking regulation have been adopted into South African law. This is done by considering the legislative and regulatory instruments regulating banks and the role of the South African Reserve Bank in facilitating compliance by banks.
Banking regulations aim to strengthen financial stability and promote policies that foster safety, consistency, reliability, fairness, and inclusion in the financial products and services offered by banks. The context of discussions in this book, spread over five carefully selected chapters, is the Indian financial system with a global perspective. It highlights the need for continual improvement in the effectiveness of regulatory and supervisory processes to achieve stability, transparency, and robustness in financial institutions and financial markets. The effectiveness of prudential regulations depends upon the institutional credibility, deterrents, and enforcement mechanism. Moreover, prudential regulations should maintain pace with the time and changing dynamics of the financial system. Putting in place clear, uncomplicated regulations, and shunning complexity in the regulatory and supervisory processes helps in achieving the intended outcomes. Besides, inadequate internal controls, false assumptions about markets and liquidity, and lack of due diligence processes in financial institutions contribute to their failures and hence, it is a regulatory challenge to incentivize the banks to join the regulators in pursuit of effective risk optimization, and achieving the common good of a stable, fair, and efficient financial system. Liquidity remains a crucial focus of prudential regulations and it is important to understand the behavioural biases such as overconfidence, linear extrapolation, confirmation bias, and group-think, which hamper effective liquidity risk management in regulated institutions. An increasingly expanding toolkit of the perpetrators of financial crimes as a latent malfunction of global integration of financial systems and the advent of digital transactions is another matter of concern for regulators requiring enhanced focus on the gatekeepers. Finally, the financial innovations and technological advancements in the world of alternative finance require an appropriate regulatory structure that facilitates an orderly growth of alternative finance within the traditional financial landscape. This book offers a crisp reading on these key areas and presents a nuanced approach to improve the effectiveness of the prudential regulations.
This paper reviews empirical and theoretical work on the links between banks and their governments (the bank-sovereign nexus). How significant is this nexus? What do we know about it? To what extent is it a source of concern? What is the role of policy intervention? The paper concludes with a review of recent policy proposals.
Macroprudential policy is a complement to microprudential policy and it interacts with other types of public policy that have an impact on systemic financial stability. Indeed, prudential regulation, as carried out in the past, also had some macroprudential aspects, and the recent crisis has reinforced this focus; hence, a clear separation between “micro” and “macro” prudential, if useful conceptually, is difficult to delineate in practice. Moreover, no matter how different policy mandates are structured, financial stability tends to be a common responsibility, reflecting the far reaching consequences of financial crises. This calls for coordination across policies, to ensure that systemic risk is comprehensively addressed. Equally important, macroprudential policy is no substitute for sound policies more broadly, including, in particular, strong prudential regulation and supervision, and sound macroeconomic policies. Operational independence in other policy areas, including monetary and microprudential policy, should not be undermined in the name of macroprudential policy. Finally, given the global nature of the financial system, the multilateral aspects of macroprudential policy will need to be fully considered—an important aspect that is only touched upon in this paper.
A distinguished economist examines competition, regulation, and stability in today's global banks Does too much competition in banking hurt society? What policies can best protect and stabilize banking without stifling it? Institutional responses to such questions have evolved over time, from interventionist regulatory control after the Great Depression to the liberalization policies that started in the United States in the 1970s. The global financial crisis of 2007–2009, which originated from an oversupply of credit, once again raised questions about excessive banking competition and what should be done about it. Competition and Stability in Banking addresses the critical relationships between competition, regulation, and stability, and the implications of coordinating banking regulations with competition policies. Xavier Vives argues that while competition is not responsible for fragility in banking, there are trade-offs between competition and stability. Well-designed regulations would alleviate these trade-offs but not eliminate them, and the specificity of competition in banking should be accounted for. Vives argues that regulation and competition policy should be coordinated, with tighter prudential requirements in more competitive situations, but he also shows that supervisory and competition authorities should stand separate from each other, each pursuing its own objective. Vives reviews the theory and empirics of banking competition, drawing on up-to-date analysis that incorporates the characteristics of modern market-based banking, and he looks at regulation, competition policies, and crisis interventions in Europe and the United States, as well as in emerging economies. Focusing on why banking competition policies are necessary, Competition and Stability in Banking examines regulation's impact on the industry's efficiency and effectiveness.
This book brings outstanding expertise and provides insightful perspectives from nineteen authors with diverse backgrounds, including officials from international organizations, national regulators, and commercial banking, as well as academics in law, economics, political economy, and finance. The authors not only shed light on the causes of the financial turmoil, but also present thoughtful proposals that contribute to the future policy debate, and discuss opportunities that financial services can offer in funding activities which raise standards of living through initiatives in microfinance, renewable energy, and food distribution. The contributions to this volume tackle several of the thorniest issues of financial regulation in a post-crisis environment, such as: the mechanics of contagion within the financial system and the role of liquidity; moral hazard when large financial institutions are no longer subject to the disciplinary effects of bankruptcy; bank capital requirements; management compensation; design of bank resolution schemes; a function-centric versus institution-centric regulatory approach; subsidization and compatibility of stimulus packages with EU rules on state aid; trade finance and the role of the GATS prudential carve-out; and the role of financial services in promoting human rights or combating climate change.