Financial regulation: Difference between revisions
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==Pre-crash financial regulation== | ==Pre-crash financial regulation== | ||
Governments have long been aware of the danger that a loss of confidence following the failure of one bank could lead to the failure of others, and to limit that danger they traditionally required all banks to maintain minimum ''reserve ratios''. Following the [[crash of 1929]] they also imposed restrictions upon the activities of the ''commercial banks''. In the United States, for example, the Glass-Steagall Act prohibiting their participation in the activities of ''investment banks''. In the 1980s, however, there was a general move toward "deregulation", those restrictions were dropped, reserve requirements were relaxed, and there followed a period of financial innovation and substantial change in the nature of banking<ref>[http://www.bis.org/publ/econ43.pdf?noframes=1 Claudio Borio and Renato Filosa: ''The Changing Borders of Banking'', BIS Economic Paper No 43, Bank for International Settlements December 1994]</ref>. The perception of a resulting increase in danger of systemic failure led, in 1988, to the publication of a set of regulatory recommendations that related a bank's required reserve ratio to the riskiness of its loans <ref>[http://www.bis.org/publ/bcbsc111.pdf?noframes=1, ''The Basel Capital Accord'' (Basel I) Basel Committee for Banking Supervision 1988]</ref> and, in 2004, to revised recommendations <ref>[http://www.bis.org/publ/bcbsca.htm Revised International Capital Framework, (Basel II) Basel Committee on Banking Supervision 2006]</ref> requiring banks to take more detailed account of the riskiness of their loans. | Governments have long been aware of the danger that a loss of confidence following the failure of one bank could lead to the failure of others, and to limit that danger they traditionally required all banks to maintain minimum ''reserve ratios''. Following the [[crash of 1929]] they also imposed restrictions upon the activities of the ''commercial banks''. In the United States, for example, the Glass-Steagall Act prohibiting their participation in the activities of ''investment banks''. In the 1980s, however, there was a general move toward "deregulation", those restrictions were dropped, reserve requirements were relaxed, and there followed a period of financial innovation and substantial change in the nature of banking<ref>[http://www.bis.org/publ/econ43.pdf?noframes=1 Claudio Borio and Renato Filosa: ''The Changing Borders of Banking'', BIS Economic Paper No 43, Bank for International Settlements December 1994]</ref>. The perception of a resulting increase in danger of systemic failure led, in 1988, to the publication of a set of regulatory recommendations that related a bank's required reserve ratio to the riskiness of its loans <ref>[http://www.bis.org/publ/bcbsc111.pdf?noframes=1, ''The Basel Capital Accord'' (Basel I) Basel Committee for Banking Supervision 1988]</ref> and, in 2004, to revised recommendations <ref>[http://www.bis.org/publ/bcbsca.htm Revised International Capital Framework, (Basel II) Basel Committee on Banking Supervision 2006]</ref> requiring banks to take more detailed account of the riskiness of their loans. Those recommendations were widely adopted, but their inadequacy was revealed by the ''[[crash of 2008]]'' when the global banking system suffered its "most severe instability since the outbreak of World War I" <ref>[http://www.bankofengland.co.uk/publications/inflationreport/infrep.htm ''Overview of the November Inflation Report'', Bank of England 2008]</ref>. and threatened the collapse of its entire financial system. That narrowly-averted catastrophe prompted the urgent consideration of measures to remedy the deficiencies of the regulatory system. | ||
==Post-crash proposals== | ==Post-crash proposals== | ||
Revision as of 06:39, 3 December 2009
Pre-crash financial regulation
Governments have long been aware of the danger that a loss of confidence following the failure of one bank could lead to the failure of others, and to limit that danger they traditionally required all banks to maintain minimum reserve ratios. Following the crash of 1929 they also imposed restrictions upon the activities of the commercial banks. In the United States, for example, the Glass-Steagall Act prohibiting their participation in the activities of investment banks. In the 1980s, however, there was a general move toward "deregulation", those restrictions were dropped, reserve requirements were relaxed, and there followed a period of financial innovation and substantial change in the nature of banking[1]. The perception of a resulting increase in danger of systemic failure led, in 1988, to the publication of a set of regulatory recommendations that related a bank's required reserve ratio to the riskiness of its loans [2] and, in 2004, to revised recommendations [3] requiring banks to take more detailed account of the riskiness of their loans. Those recommendations were widely adopted, but their inadequacy was revealed by the crash of 2008 when the global banking system suffered its "most severe instability since the outbreak of World War I" [4]. and threatened the collapse of its entire financial system. That narrowly-averted catastrophe prompted the urgent consideration of measures to remedy the deficiencies of the regulatory system.
Post-crash proposals
[5].
[6].
[7].
The authorities' reactions
[9]; and in a 2005 lecture, Jean-Claude Trichet, the President of the European Central Bank, argued that not all bubbles threaten financial stability, and that if policy-makers attempted to eliminate all risk from the financial system, they either fail or they would "hamper the appropriate functioning of a market economy"[10]. [11], and by Federal Reserve Board Governor Frederic Mishkin [12]
Policy decisions
References
- ↑ Claudio Borio and Renato Filosa: The Changing Borders of Banking, BIS Economic Paper No 43, Bank for International Settlements December 1994
- ↑ The Basel Capital Accord (Basel I) Basel Committee for Banking Supervision 1988
- ↑ Revised International Capital Framework, (Basel II) Basel Committee on Banking Supervision 2006
- ↑ Overview of the November Inflation Report, Bank of England 2008
- ↑ Asset Prices and the Business Cycle, World Economic Outlook, Chapter 3, International Monetary Fund, May 2000
- ↑ Lessons for Monetary Problems from Asset Price Fluctuations, (World Economic Outlook October 2009 Chapter 3) International Monetary Fund 2009
- ↑ The Warwick Commission on International Financial Reform: In Praise of Unlevel Playing Fields, (The report of the second Warwick Commission) University of Warwick, November 2009
- ↑ The Role of Macroprudential Policy, a discussion paper, Bank of England, November 2009
- ↑ Ben Bernanke: Asset-Price "Bubbles" and Monetary Policy (Speech to the New York Chapter of the National Association for Business Economics, New York, New York, October 15 2002) Federal Reserve Board 2002
- ↑ Jean-Claude Trichet: Asset price bubbles and monetary policy,(Mas lecture, 8 June 2005) European Central Bank, 2005
- ↑ Mark Carney, Governor of the Bank of Canada: Some Considerations on Using Monetary Policy to Stabilize Economic Activity, (Speech to the Foreign Policy Association, New York, 19 November 2009)Bank for International Settlements, 2009
- ↑ Frederic Mishkin: How Should We Respond to Asset Price Bubbles, Board of Governors of the Federal Reserve System, October 2008