It has been claimed that recessions as a result of a financial crisis tend to last longer than normal recessions. This column asks whether early intervention to help distressed banks during financial crises is effective in mitigating the consequences of financial distress. The evidence suggests that decisive and early recapitalisation of banks can shorten recessions by several years and help speed up recovery.
Timotej Homar, Sweder van Wijnbergen, 13 February 2016
Jakob de Haan, Wijnand Nuijts, Mirea Raaijmakers, 06 November 2015
The Global Crisis revealed serious deficiencies in the supervision of financial institutions. In particular, regulators neglected organisational culture at the institutional level. This column reviews efforts since 2011 by De Nederlandsche Bank to oversee executive behaviour and cultures at financial institutions. These measures aimed at identifying risky behaviour and decision-making processes at a sufficiently early stage for appropriate countermeasures to be implemented. The findings show that regulators can play a larger part in securing the stability of the financial system by taking an active role in shaping institutional cultural processes.
Xavier Vives, 17 March 2015
The 2007–08 crisis revealed regulatory failures that had allowed the shadow banking system and systemic risk to grow unchecked. This column evaluates recent proposals to reform the banking industry. Although appropriate pricing of risk should make activity restrictions redundant, there may nevertheless be complementarities between these two approaches. Ring-fencing may make banking groups more easily resolvable and therefore lower the cost of imposing market discipline.
Jussi Keppo, Josef Korte, 07 September 2014
Four years ago, the Volcker Rule was codified as part of the Dodd–Frank Act in an attempt to separate allegedly risky trading activities from commercial banking. This column presents new evidence finding that those banks most affected by the Volcker Rule have indeed reduced their trading books much more than others. However, there are no corresponding effects on risk-taking – if anything, affected banks take more risks and use their trading accounts less for hedging.
David Lucca, Amit Seru, Francesco Trebbi, 11 August 2014
Job transitions in the US banking between the regulatory and private sector – or the revolving door – have been under intense scrutiny, receiving both criticism and more benign views. However, the lack of systematic data makes drawing strong conclusions difficult. This column sheds light on these discussions by the use of new and unique data of career paths of current and former regulators, spanning 25 years. The results suggest lower employment spells of regulatory personnel in more recent years and for workers with higher education. Tightening the revolving door without altering other aspects of worker incentives may further create challenges for regulatory agencies to seek and retain talent.
George Kopits, 24 December 2013
Germany’s newly established Advisory Council – tasked with monitoring compliance with the constitutionally mandated balanced budget rule – lacks the analytical capacity and independence of its counterparts in the UK, the US, and the Netherlands. It is perhaps by virtue of the current government’s record of fiscal responsibility that a more comprehensive watchdog is not urgently needed, but the newly formed coalition should not miss the opportunity to establish comprehensive fiscal and banking oversight.
Donato Masciandaro, Francesco Passarelli, 21 December 2013
During the Great Moderation, central banks focused on price stability, and independence was seen as crucial to limit inflation bias. Since the Global Financial Crisis, emergency support measures for banks, and central banks’ increasing involvement in supervision, have called central bank independence into question. This column argues that the literature has overlooked the distributional effects of the tradeoff between monetary and financial stability. In a political economy framework, heterogeneity in voters’ portfolios can cause the degree of central bank independence to differ from the social optimum.
Jeremy Bulow, Jacob Goldfield, Paul Klemperer, 29 August 2013
Today’s regulatory rules – especially the ineffective capital requirements – have led to costly bank failures. This column proposes a new, robust approach that uses market information but does not depend upon markets being ‘right’. Under the proposed regulatory system (i) bank losses are credibly borne by the private sector (ii) systemically important institutions cannot collapse suddenly; (iii) bank investment is counter-cyclical; and (iv) regulatory actions depend upon market signals. One key innovation is ‘Equity Recourse Notes’ that gradually ‘bail in’ equity as needed. These are superficially similar to, but fundamentally different from, 'CoCos'.
Markus K Brunnermeier, Hans Gersbach, 20 December 2012
As governments and the EU wring their hands over banking reform, a fragile system remains in place. This column argues that the ECB’s current role undermines its independence. What the Eurozone needs to reduce undue forbearance - while preserving the ECB's independence - is a ‘diarchy’ in which both a newly built Restructuring Authority and the ECB have the power to trigger bank-restructuring.
Jihad Dagher, Ning Fu, 26 June 2012
Ever since the recent mortgage crisis, calls for tighter regulation on lenders have been widespread. But would stricter supervision and regulation of lenders have been any use during the frenzied optimism of a boom? This column argues that it might. It shows that lending by the loosely regulated non-bank companies was associated with higher foreclosure during the housing downturn when compared with lending by the more tightly regulated banks.
Thorsten Beck, Daniel Gros, Dirk Schoenmaker, 24 June 2012
After more than two years of efforts and innumerable emergency summits, the Eurozone crisis shows now signs of responding to treatment. This column argues that solving the Eurozone crisis requires policies that separate the banking and sovereign facets of the crisis. The losses incurred by Europe’s banks must be swiftly recognised by establishing a European Resolution Authority to identify weak banks and fix or liquidate them. Such an institution needs a fiscal backstop and the ESM should provide one. But this would not create Eurobonds – the very need for Eurobonds might to some extent disappear with a strong banking union.
Jacopo Carmassi, Stefano Micossi, 28 March 2012
Excessive risk-taking by large banks was among the main causes of the 2008–09 financial crisis. This column argues that the antidote to excessive risk-taking should come from the elimination of the subsidies of the banking charter and the implicit promise of bailout in case of major losses, and the introduction of strong incentives for management and shareholders to preserve the capital of their bank. This requires deep changes in Basel prudential rules.
Thorsten Beck, 28 October 2011
Thorsten Beck talks to Viv Davies about the recently published Vox eBook on ‘The Future of Banking’ – a collection of essays by leading European and US economists that provide solutions to the current financial crisis and proposals for medium- to long-term regulatory reforms. The authors call for a forceful resolution to the current crisis in the Eurozone, better incentives for banks to internalize risk and a more credible resolution regime. The interview was recorded on 27 October 2011. [Also read the transcript]
Thorsten Beck, 25 October 2011
For better or worse, banking is back in the headlines. From the desperate efforts of crisis-struck Eurozone governments to the Occupy Wall Street movement currently spreading across the globe, the future of banking is hotly debated. This column summarises a new VoxEU.org eBook containing essays by leading economists that discuss both immediate solutions to the on-going financial crisis and medium- to long-term regulatory reforms.
Hans Gersbach, 12 October 2011
The way in which monetary policy, macroprudential policy, and microprudential regulation of banks should be organised and conducted is a major, as yet unresolved, issue. In CEPR Policy Insight No.58, the author outlines a policy framework for addressing this issue.
Xavier Vives, 18 September 2010
With the recent wave of bank bailouts and mergers, competition in the sector has surely been affected. This column introduces a new Policy Insight arguing that a trade-off between regulation and competition in the banking sector, while complex, does exist. The optimal policy requires coordination between regulation and competition policy depending on the level of competition in the market.
Xavier Vives, 12 August 2010
CEPR Policy Insight 50 models the trade-off between competition and stability in the banking sector. Competition might increase instability through two channels: by exacerbating the coordination problem of depositors/investors on the liability side and fostering panics; and by increasing incentives to take risk, and thus the raising probability of failure. Regulation can alleviate this competition-stability trade-off, but the design of optimal regulation has to take into account the intensity of competition.
Charles A.E. Goodhart, 10 June 2010
As a consensus among academics begins to emerge over counter-cyclical financial regulation, former Bank of England Monetary Policy Committee member Charles A E Goodhart outlines why he is sceptical about “conditional convertibles” or CoCos – a form of debt that is “quasi-automatically” transformed into equity when banks get into trouble. Goodhart argues that CoCos would make the system more complex, potentially leading to problematic market dynamics.
Peter Praet, Gregory Nguyen, 16 April 2010
The global crisis has called into question the efficacy of regulation in all affected markets – none more so than the EU. This column argues that the time when each European country can have a different resolution framework has come to an end and the EU’s resolution framework is still in need of major reform.
Dirk Schoenmaker, 19 December 2009
Current practice of national crisis resolution is threatening the EU’s single banking market. The financial trilemma suggests that policymakers can only choose two out of the following three objectives: financial stability, financial integration, and national financial policies. This column argues that EU burden-sharing rules among governments can save the single market.