Their lower aversion to risk supported by the states

Info iconThis preview shows page 1. Sign up to view the full content.

View Full Document Right Arrow Icon
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: of system that hardly intermediates or a thriving system that frequently collapses of its own weight—are of course to be avoided. A fully specified reform proposal that meets these challenges lies much beyond the scope of this paper (even more so since the devil is in the implementation details). There is however a minimum set of basic objectives that, in our view, any new prudential architecture should seek to fulfill, either because they 82 A number of important and detailed proposals to fix the regulatory framework have already seen the light of day. See for example Financial Stability Forum (2008), Basel Committee on Banking Supervision (2008 a, and b, and 2009), Institute for International Finance (2008), and Goldstein (2008). The November 2008 Declaration of the G‐ 20 Summit on Financial Markets and the World Economy identifies the “root causes of the crisis”, sets out “common principles for reform of financial markets” and sketches an “action plan” to implement such principles. Rather than questioning the basic architecture and foundations of the current framework, these proposals have so far and for the most part sought to maintain (and build upon) this framework. While this approach is clearly understandable from a practitioner’s perspective, its longer term success will very much depend on the extent to which the key issues and interactions underpinning all three paradigms discussed in this paper are satisfactorily addressed. 46 cut across paradigms or they are absolutely central to one of the paradigms. Given the popularity of the agency paradigm, the reform agenda will likely be strong in addressing principal‐agent issues (including through governance improvements, changes in management compensation schemes, and increased skin‐in‐the‐game requirements). Hence, we focus in this section mainly on the objectives of the regulatory reform needed to address central issues under the externalities and mood swings paradigms. The first objective, which is particularly relevant to the externalities paradigm but applies to all, is full regulatory neutrality. In a world where regulation is not applied uniformly, financial flows will sooner or later find the line of least resistance, giving unregulated financial institutions a competitive advantage and making them grow to the point where they become systemic behemoths. There are two possible solutions to this quandary. One is to make all financial intermediaries fit within the universal banking mode. This solution, however, would limit entry unduly and promote the preponderance of very large, too‐big‐to‐fail, financial conglomerates with limited creativity and large non‐competitive rents. The alternative—which we find to be superior—is to maintain a distinction between commercial banks and other non‐deposit taking financial intermediaries, but make the latter choose between being prudentially regulated or being unregulated. All regulated intermediaries would need to satisfy the same prudential require...
View Full Document

This document was uploaded on 11/14/2013.

Ask a homework question - tutors are online