Rethinking Financial Regulation: How Confusion Has Prevented Progress

Forthcoming in Rethinking Macroeconomics III: Progress or Confusion? Olivier J. Blanchard, Raghuram Rajan, Kenneth S. Rogoff, and Lawrence H. Summers, editors, MIT Press.

Rock Center for Corporate Governance at Stanford University Working Paper No. 207

Stanford University Graduate School of Business Research Paper No. 15-41

12 Pages Posted: 29 Jun 2015 Last revised: 30 Oct 2015

See all articles by Anat R. Admati

Anat R. Admati

Stanford Graduate School of Business

Date Written: October 20, 2015

Abstract

The extreme fragility of the financial system that gives rise to systemic risk and crises is rooted in the incentives of people within this system and the failure of regulation to counter these incentives. The same forces that increase systemic risk also distort credit markets, exacerbate governance and control problems, and create opacity and inefficiencies.

I discuss the flaws in existing capital regulations, including measurement issues, low equity levels, the risk-weighting system, and the use of debt-like hybrids such as Total Loss Absorbing Capacity (TLACs) as substitutes for equity. Regulatory reform efforts do not reflect lessons from the failure of past regulation. I also discuss briefly shadow banking and the politics of financial regulation. Confusions and flawed narratives have muddled the policy debate and, together with political forces, helped derail progress towards a safer and healthier financial system. . .

Keywords: regulation of financial institutions, financial crises, capital structure and payouts, Basel, risk weights, shadow banking, leverage,

JEL Classification: G21, G28, G32, G38, H81, K23

Suggested Citation

Admati, Anat R., Rethinking Financial Regulation: How Confusion Has Prevented Progress (October 20, 2015). Forthcoming in Rethinking Macroeconomics III: Progress or Confusion? Olivier J. Blanchard, Raghuram Rajan, Kenneth S. Rogoff, and Lawrence H. Summers, editors, MIT Press., Rock Center for Corporate Governance at Stanford University Working Paper No. 207, Stanford University Graduate School of Business Research Paper No. 15-41, Available at SSRN: https://ssrn.com/abstract=2624064 or http://dx.doi.org/10.2139/ssrn.2624064

Anat R. Admati (Contact Author)

Stanford Graduate School of Business ( email )

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United States
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