The Future of Banking Regulation and Financial Stability

Dear Colleagues,

The recent global financial crisis has brought to the fore several issues pertaining to regulation, supervision and the interactions of all players in the markets, including national governments. Moreover, the response to the crisis has reignited old policy debates, albeit in a different context – that of prudential regulation/supervision and financial fragility.

Indicatively, the ‘failure’ of quantitative risk-assessment models to predict the extensive fragility in the period leading up to the crisis has led to the adoption (in Basel III) of simpler quantitative rules and to the strengthening of regulatory discretion (in the form, say, of counter-cyclical buffers). What lessons might be drawn from the policy debates of the late 1970s on ‘Rules vs. Discretion’?

Also, the rapid metastasis of risks, say, from liquidity to credit/asset via the forced sales of assets and the deterioration of overall economic conditions, has raised the issue of whether simple and transparent rules, which help stabilize expectations in cases of fragility, are preferable to complicated rules. Is ‘fine-tuning’ in risk management, as that implied by complicated quantitative rules about capital adequacy, liquidity and operational risk – among others, feasible? Desirable? And under what conditions pertaining to the economic environment and the institutional and legal infrastructure?

Last but not least, the huge fiscal burden, from bank recapitalization and the recession caused by the crisis, raises the issue of whether supervision can (or should) be independent from fiscal policy. What lessons might be drawn from the extensive literature on central bank independence?

Indicative topics:

1. Interaction of risks, regulations and incentives: Does Basel III go far enough to address perverse incentives and the pertinent negative externalities?
2. Institutional and legal infrastructure needed for Basel III
3. Simple rules vs. Complicated rules: ‘Fine-tuning’ in a turbulent economic environment
4. Feedback loops between regulation/supervision and banking risks
5. Strict rules (no discretion) and lenient application vs. Lenient rules (with discretion) and strict application
6. Rules vs. Discretion and the ‘Time-inconsistency Problem’
7. Micro vs. Macro prudential regulation: Which is best, in normal times? in turbulent times?
8. Financial fragility: Treating the symptoms (focusing on resolution regimes) or the disease (focusing on prevention)?
9. Basel III and Banking Union in the EU
10. Lessons from past crises and from the theoretical literature on banking crises.

Prof. Dr. Angelos A. Antzoulatos
Guest Editor

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• regulation
• supervision
• Basel III
• rules vs. discretion
• time inconsistency problem
• supervision and economic policy coordination
• micro prudential regulation
• macro prudential regulation
• financial fragility
• european banking union