Working Paper: CEPR ID: DP11147
Authors: Thorsten Beck; Elena Carletti; Itay Goldstein
Abstract: This chapter discusses recent regulatory reforms and relates them to different market failures in banking, based on the recent theoretical and empirical literature with focus on insights from the recent crisis. We also provide a broader discussion of challenges in financial sector regulation, related to the regulatory perimeter and financial innovation as tools financial market participants use to evade tighter regulatory frameworks. We argue for a dynamic view of regulation that takes into account the changing nature of risk-taking activities and regulatory arbitrage efforts. We also stress the need for a balanced approach between complex and simple tools, a strong focus on systemic in addition to idiosyncratic regulation, and a stronger emphasis on the resolution phase of financial regulation.
Keywords: banking regulation; Basel III; financial stability
JEL Codes: G21; G28
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Regulatory reforms (G18) | reduced fragility in the banking system (F65) |
| Improved regulation (G18) | enhanced financial stability (G28) |
| Establishment of a banking union (F36) | improved financial outcomes (G29) |
| Adaptive regulation (L51) | better financial stability (G59) |
| Institutional reforms (O17) | improved regulatory oversight (G18) |
| Balance of regulatory tools (G18) | more effective regulation (G18) |