Paper
Some Lessons for Regulation from Recent Bank Crises
How can the probability of banking crises be reduced?
35 pages
This paper summarises eight main causal factors in recent banking crises:
- Volatility in the macro-economy;
- The inheritance of structural weaknesses in the economy;
- Bad banking practices;
- Hazardous incentive structures and moral hazard within the financial system;
- Ineffective financial regulation;
- Weak monitoring and supervision by official agencies;
- The absence of effective market discipline against hazardous bank behaviour due partly to the lack of transparency and disclosure of relevant information;
- Structurally unsound corporate governance mechanisms within banks.
Outlines characteristics of a stable financial system, such as:
- Regulation;
- Incentive structures for all the major players including regulators and supervisors;
- Monitoring and supervision;
- Official intervention in the event of bank distress;
- The role of market discipline;
- Corporate governance guidelines.
Denotes five key criteria of a regulatory regime:
- The extent to which it generates appropriate incentives for banks' owners and managers;
- Whether it generates correct pricing of absolute and relative risk of bank loans;
- Whether it minimizes existing and new moral hazards;
- The extent to which sufficient differentiation is made between institutions based on overall portfolio risks;
- The impact on competitive conditions and whether it is neutral between different competing firms.
[Author's abstract]
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