Misdiagnosis: Incomplete Cures of Financial Regulatory Failures

35 Pages Posted: 30 Jul 2014

See all articles by James R. Barth

James R. Barth

Auburn University; Milken Institute

Gerard Caprio

Williams College

Ross Levine

University of California, Berkeley - Haas School of Business; National Bureau of Economic Research (NBER)

Date Written: July 28, 2014

Abstract

In the aftermath of the global financial crisis, U.S. authorities are attempting to improve financial regulation and supervision. This involves a three-step process: (1) diagnosis of what went wrong, (2) design regulatory and supervisory reforms that address these defects, and (3) implement the corrective reforms. In our paper, we argue that ongoing efforts to enhance U.S. financial regulation and supervision have faltered along each of these three dimensions. We support our arguments with several specific example that highlight deficiencies in the diagnosis of and policy response to the financial crisis. The focus is on regulatory and supervisory reforms since 2009. It is documented that the U.S. authorities misdiagnosed the causes of the crisis both by over-emphasizing factors that did not play decisive roles in causing the onset or the severity of the crisis and by under-emphasizing factors that did. As a result of the misdiagnosis, we explain how many of the reforms advanced by the authorities will do little to fix problems with the regulations and supervision of financial markets and institutions and improve the safety and soundness of the U.S. financial system.

Keywords: Regulation, Supervision, Systemic Risk, Financial Crises, Central Banking

JEL Classification: G28, G21, G24, G32, G38

Suggested Citation

Barth, James R. and Caprio, Gerard and Levine, Ross Eric, Misdiagnosis: Incomplete Cures of Financial Regulatory Failures (July 28, 2014). Available at SSRN: https://ssrn.com/abstract=2472974 or http://dx.doi.org/10.2139/ssrn.2472974

James R. Barth (Contact Author)

Auburn University ( email )

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Milken Institute ( email )

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Gerard Caprio

Williams College ( email )

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Ross Eric Levine

University of California, Berkeley - Haas School of Business ( email )

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Berkeley, CA 94720
United States

National Bureau of Economic Research (NBER)

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Cambridge, MA 02138
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