Enhancing Prudential Standards in Financial Regulations

26 Pages Posted: 23 Dec 2014 Last revised: 25 Dec 2014

See all articles by Franklin Allen

Franklin Allen

Imperial College London

Itay Goldstein

University of Pennsylvania - The Wharton School - Finance Department

Julapa Jagtiani

Federal Reserve Banks - Federal Reserve Bank of Philadelphia

William W. Lang

Promontory Financial Group

Date Written: December 3, 2014

Abstract

The financial crisis has generated fundamental reforms in the financial regulatory system in the U.S. and internationally. Much of this reform was in direct response to the weaknesses revealed in the precrisis system. The new “macroprudential” approach to financial regulations focuses on risks arising in financial markets broadly, as well as the potential impact on the financial system that may arise from financial distress at systemically important financial institutions. Systemic risk is the key factor in financial stability, but our current understanding of systemic risk is rather limited. While the goal of using regulation to maintain financial stability is clear, it is not obvious how to design an effective regulatory framework that achieves the financial stability objective while also promoting financial innovations. This paper discusses academic research and expert opinions on this vital subject of financial stability and regulatory reforms. Specifically, among other issues, it discusses the impact of increasing public disclosure of supervisory information, the effectiveness of bank stress testing as a tool to enhance financial stability, whether the financial crisis was caused by too big to fail (TBTF), and whether the Dodd-Frank Wall Street Reform and Consumer Protection Act (DFA) resolution regime would be effective in achieving financial stability and ending TBTF.

Keywords: Financial Stability, Financial Regulations, Systemic Risk, Too Big To Fail, Stress Testing, Resolution Plan, Mortgage Finance

JEL Classification: G01, G18, G21, G23, G28

Suggested Citation

Allen, Franklin and Goldstein, Itay and Jagtiani, Julapa A. and Lang, William W., Enhancing Prudential Standards in Financial Regulations (December 3, 2014). FRB of Philadelphia Working Paper No. 14-36. Available at SSRN: https://ssrn.com/abstract=2541672 or http://dx.doi.org/10.2139/ssrn.2541672

Franklin Allen

Imperial College London ( email )

South Kensington Campus
Exhibition Road
London, Greater London SW7 2AZ
United Kingdom

Itay Goldstein

University of Pennsylvania - The Wharton School - Finance Department ( email )

The Wharton School
3620 Locust Walk
Philadelphia, PA 19104
United States
215-746-0499 (Phone)

Julapa A. Jagtiani (Contact Author)

Federal Reserve Banks - Federal Reserve Bank of Philadelphia ( email )

Ten Independence Mall
Philadelphia, PA 19106-1574
United States

William W. Lang

Promontory Financial Group ( email )

1201 Pennsylvania Avenue, NW
Suite 617
Washington, DC 20004
United States

HOME PAGE: http://www.promontory.com

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