Empowering Supervisors with More Principles and Discretion to Implement Them Will Not Reduce the Dangers of the Prudential Approach to Financial Regulation

PSL Quarterly Review, Vol. 63, No. 255, pp. 361-376, 2010

16 Pages Posted: 22 Apr 2011

Date Written: April 19, 2011

Abstract

The paper addresses two main points: the deficiencies of the past regulatory design and the additional dangers coming from financial reforms that increase the regulatory powers of supervisors. The first point is briefly dealt with reference to past experience and alternative theoretical approaches. For the second point I argue that a prudential regulatory design necessarily leaves large discretionary powers to supervisors, who use them to shape the effective direction impressed to regulation. The current crisis has shown that the force of its first impact much depended on how supervisors had formerly utilised their discretion. Recent reforms and proposals are not changing the basic design of prudential regulation, while give additional regulatory powers to supervisors. If, as a consequence, we will experience in the short-run some regulatory uncertainty, lobbying pressures and international regulatory arbitrage will most probably guide the final result towards few additional regulatory costs and an unchanged systemic fragility. As an alternative we could go back to the methodology, not the specific design, of the Glass-Steagall Act, shaping the financial system by means of structural rules aided by few simple prudential ones.

Keywords: financial regulatory framework, financial supervision, systemic risk

JEL Classification: G18, G20, G28

Suggested Citation

Tonveronachi, Mario, Empowering Supervisors with More Principles and Discretion to Implement Them Will Not Reduce the Dangers of the Prudential Approach to Financial Regulation (April 19, 2011). PSL Quarterly Review, Vol. 63, No. 255, pp. 361-376, 2010, Available at SSRN: https://ssrn.com/abstract=1815160

Mario Tonveronachi (Contact Author)

University of Siena ( email )

Via Banchi di Sotto, 55
Siena, 53100
Italy

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
92
Abstract Views
829
rank
310,684
PlumX Metrics