Banking Regulations after the Global Financial Crisis, Good Intentions and Unintended Evil

Abstract

As a result of the global financial crisis, more stringent regulations on bank capital, liquidity and corporate structure have been passed. In this essay, we analyze the impact of these regulations and call attention to the fact that the dynamic responses by financial institutions might create unintended evil: a reduced supply of bank loans, incentives to securitize assets and move financial intermediation to shadow banking, and adverse incentives on bank risk monitoring. The conclusion is that privately-based mechanisms that put most creditors at risk - interbank lenders included - are the best way to restore the stability of financial markets.

Keywords: banking, bank regulation, Basel regulation

JEL Classification: G21,G28