Financial Regulation after the Crisis: How Did We Get Here, and How Do We Get Out?

49 Pages Posted: 7 Nov 2013

Date Written: November 5, 2013

Abstract

Following the crisis of 2007, regulatory authorities either are or should be engaging in a fundamental reconsideration of how they approach financial regulation and supervision. This paper briefly summarizes the present international consensus on regulation as embodied in the Basel framework, looks at how we came to be in such a situation, and proposes a re-start of the process that has been organized by the Basel Committee on Bank Supervision. It reviews the flaws of that framework and concludes that its weaknesses are fundamental, in its neglect of the endogeneity of risk to the regulatory structure, and of the dynamic nature of finance, and thus of its regulation as well. Neither a static rulebook, nor an ever increasingly complex one, will ever provide financial safety and soundness. Specific recommendations are made, starting with an abandonment of risk weights and the adoption of a simple leverage rule, supplemented by CoCos, and some simple rules. More radically, a different approach is urged, one that focuses on the oversight and accountability of regulators and greater transparency, both of banks and of the regulatory process.

Keywords: Financial Regulation, Basel, risk weighting, Sentinel

JEL Classification: G01, G280

Suggested Citation

Caprio, Gerard, Financial Regulation after the Crisis: How Did We Get Here, and How Do We Get Out? (November 5, 2013). Available at SSRN: https://ssrn.com/abstract=2350564 or http://dx.doi.org/10.2139/ssrn.2350564

Gerard Caprio (Contact Author)

Williams College ( email )

Williamstown, MA 01267
United States
413-597-2465 (Phone)
413-597-4045 (Fax)

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