Hostname: page-component-cd9895bd7-q99xh Total loading time: 0 Render date: 2024-12-29T01:45:58.312Z Has data issue: false hasContentIssue false
  • English
  • Français

Macroprudential Regulation — The Missing Policy Pillar

Published online by Cambridge University Press:  26 March 2020

E. Philip Davis  and
Dilruba Karim
E. Philip Davis*
Affiliation:
National Institute of Economic and Social Research and Brunel University
Dilruba Karim*
Affiliation:
Brunel University
*
E-mail: [email protected]
E-mail: [email protected]
Get access Rights & Permissions [Opens in a new window]

Abstract

The recent Sub-Prime crisis has prompted a close focus on the causes of financial instability as well as the issue of whether it can be prevented. There is a growing realisation that the Sub-Prime crisis, although having some important unique features, also had a number of generic aspects in common with earlier financial crises, of which a large number have been seen in recent decades. Accordingly, the crisis has prompted a debate about macroprudential policy, which focuses on the financial system as a whole, treating aggregate risk as endogenous with regard to collective behaviour of institutions. Our survey shows that a great deal of progress has been made in ‘macroprudential surveillance’ and related research on causes and predictors of crises. Much less progress has been made in ‘macroprudential regulation’, the design and implementation of policies to prevent or mitigate threatened crises.

Keywords

Financial crisesmacroprudential policyfinancial regulationG28E44
Type
Research Articles
Information
National Institute Economic Review , Volume 211 , January 2010 , pp. R3 - R16
Copyright
Copyright © 2010 National Institute of Economic and Social Research

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

Footnotes

∗

Parts of this paper are derived from Davis and Karim (2008c) which also appeared in Mayes et al. (2009). An earlier version was keynote address at the 6th Euroframe Conference on Economic Policy Issues in the European Union, 12 June 2009, entitled 'Causes and consequences of the current financial crisis, what lessons for EU countries?' The authors thank participants in the Euroframe Conference and at a seminar at HM Treasury in October 2009 for helpful comments.

References

Acharya, V. and Richardson, M. (2009), ‘Causes of the financial crisis’, Critical Review, 21, pp. 195–210.CrossRefGoogle Scholar
Adrian, T. and Shin, H.S. (2008), ‘Liquidity and financial contagion’, in Banque de France Financial Stability Review: Special Issue on Liquidity, No. 11, pp. 1–7.Google Scholar
Allen, F. (2005), ‘Modelling financial instability’, National Institute Economic Review, 192, April.CrossRefGoogle Scholar
Allen, F. and Gale, D. (2000), ‘Bubbles and crises’, Economic Journal, 110, pp. 236–55.CrossRefGoogle Scholar
Aspachs, O., Goodhart, C.A.E., Tsomocos, D.P. and Zicchino, L. (2007), ‘Towards a measure of financial fragility’, Annals of Finance, 3, pp. 37–74.CrossRefGoogle Scholar
Bank of England (2008), Financial Stability Report, October 2008, London, Bank of England.Google Scholar
Bank of England (2009), ‘The role of macroprudential policy, a discussion paper’, November, London, Bank of England.Google Scholar
Banque de France (2008), Financial Stability Review, Special Issue on Liquidity, Paris, Banque de France.Google Scholar
Barrell, R. and Davis, E.P. (2008), ‘The evolution of the financial market crisis in 2008’, National Institute Economic Review, 206, pp. 5–14.CrossRefGoogle Scholar
Barrell, R., Davis, E.P., Fic, T., Holland, D., Kirby, S. and Liadze, I. (2009), ‘Optimal regulation of bank capital and liquidity: how to calibrate new international standards’, FSA Occasional Paper No 38.Google Scholar
Barrell, R., Davis, E.P., Karim, D. and Liadze, I. (2009), ‘Bank regulation, property prices and early warning systems for banking crises in OECD countries’, National Institute Discussion Paper No. 330, and Journal of Banking and Finance (forthcoming).CrossRefGoogle Scholar
Barrell, R., Davis, E.P., Karim, D. and Liadze, I. (2010), ‘Contagious effects of banking crises in OECD countries’, NIESR, mimeo.Google Scholar
Benninga, S. and Weiner, Z. (1998), ‘Value at risk (VaR)’, Mathematica in Education and Research, 7, 4, pp. 39–45.Google Scholar
Bernard, H. and Bisignano, J. (2000), ‘Information, liquidity and risk in the international interbank market: implicit guarantees and private credit market failure’, BIS Working Paper No. 86.Google Scholar
BIS (2000), Stress Testing by Large Financial Institutions: Current Practice and Aggregation Issues, Committee on the Global Financial System, Switzerland, Bank for International Settlements.Google Scholar
BIS (2001), A Survey of Stress Tests and Current Practice at Major Financial Institutions, Report by a Task Force Established by the Committee on the Global Financial System of the Central Banks of the G10 Countries. BIS Publications, Switzerland, Bank for International Settlements.Google Scholar
Borio, C. (2009), ‘The macroprudential approach to regulation and supervision, What? How Why?’, presentation to the Banque de France and Toulouse School of Economics Conference on the Future of Financial Regulation, 28 January.Google Scholar
Borio, C. and Drehmann, M. (2009), ‘Assessing the risk of banking crises - revisited’, BIS Quarterly Review, March, pp. 29–46.Google Scholar
Brooks, C. and Katsaris, A. (2003), ‘Rational speculative bubbles: an empirical investigation of the London Stock Exchange’, Bulletin of Economic Research, 55, pp. 319–46.CrossRefGoogle Scholar
Brunnermeier, M. (2009), ‘Deciphering the 2007/8 Liquidity and Credit crunch’, Journal of Economic Perspectives, 23, pp. 77100.CrossRefGoogle Scholar
Brunnermeier, M., Crockett, A., Goodhart, C., Persaud, A.D. and Shin, H. (2009), ‘The fundamental principles of financial regulation’, Geneva Reports on the World Economy 11, International Center for Monetary and Banking Studies and Centre for Economic Policy ResearchGoogle Scholar
Calomiris, C.W. and Mason, J.R. (2000), ‘Causes of U.S. bank distress during the depression’, NBER Working Papers 7919, National Bureau of Economic Research, Inc.CrossRefGoogle Scholar
Chai, J. and Johnston, R.B. (2000), ‘An incentive approach to identifying financial system vulnerabilities’, IMF Working paper No WP/00/2II.CrossRefGoogle Scholar
Chan-Lau, J.A. (2006), ‘Market-based estimation of default probabilities and its application to financial surveillance’, International Monetary Fund Working Paper 06/104, Washington, DC, IMF.CrossRefGoogle Scholar
Chan-Lau, J.A. and Sy, A.N.R. (2007), ‘Distance-to-default in banking: a bridge too far?’, Journal of Banking Regulation, 9, 1, pp. 14–24, November.CrossRefGoogle Scholar
Chen, Y. (1999), ‘Banking panics: the role of the first-come, first- served rule and information externalities’, Journal of Political Economy, 107, pp. 946–68.CrossRefGoogle Scholar
Cihak, M. (2006), ‘How do central banks write about financial stability?’, IMF Working Paper WP/06/163.CrossRefGoogle Scholar
Crosbie, P.J. and Bohn, J.R. (2002), Modelling Credit Risk, California, KMV LLC.Google Scholar
Das, U., Quintyn, M., Chenard, K. (2004), ‘Does regulatory governance matter for financial system stability?’, IMF Working Paper WP/04/89.CrossRefGoogle Scholar
Davis, E.P. (1991), ‘Bank credit risk’, Working Paper no. 8, London, Bank of England.Google Scholar
Davis, E.P. (1994), ‘Market liquidity risk’, in Fair, D. and Raymond, R. (eds), The Competitiveness of Financial Institutions and Centres in Europe, Kluwer Academic Publishers.Google Scholar
Davis, E.P. (1995), Debt, Financial Fragility and Systemic Risk, Oxford, Oxford University Press.CrossRefGoogle Scholar
Davis, E.P. (1999), ‘Financial data needs for macroprudential surveillance: what are the key indicators of risk to domestic financial stability?’ Lecture Series No 2, Centre for Central Banking Studies, Bank of England.Google Scholar
Davis, E.P. (2002), ‘A typology of financial instability’, Financial Stability Report, 2, Vienna, Oesterreichische Nationalbank.Google Scholar
Davis, E.P. (2009a), ‘The lender of last resort and liquidity provision - how much of a departure is the subprime crisis?’, paper presented at the Conference entitled ‘Regulatory Response to the Financial Crisis’, London School of Economics, 19th January, and Brunel Economics and Finance Working Paper No. 09-09.Google Scholar
Davis, E.P. (2009b), ‘Financial stability in the United Kingdom, banking on prudence’, OECD Economics Department Working Paper No. 716.Google Scholar
Davis, E.P. and Karim, D. (2008a), ‘Comparing early warning systems for banking crises’, Journal of Financial Stability, 4, pp. 89–120.CrossRefGoogle Scholar
Davis, E.P. and Karim, D. (2008b), ‘Could early warning systems have helped to predict the sub-prime crisis?’, National Institute Economic Review, 206, pp. 35–47.CrossRefGoogle Scholar
Davis, E.P. and Karim, D. (2008c), ‘Research in and policy for financial stability - what have we learnt?’, Economics and Finance Working Paper, No. 08-14, Brunel University.Google Scholar
De Bandt, O. and Hartmann, P. (2000), ‘Systemic risk: a survey’, ECB Working Paper No. 35, European Central Bank.Google Scholar
Degennaro, R.P. and Thomson, J.B. (1996), ‘Capital forbearance and thrifts: examining the costs of regulatory gambling, Journal of Financial Services Research, 10, pp. 199–211.CrossRefGoogle Scholar
Demirgüç-Kunt, A. and Detragiache, E. (2005), ‘Cross-country empirical studies of systemic bank distress: a survey’, IMF Working Papers 05/96, International Monetary Fund.CrossRefGoogle Scholar
Demirgüç-Kunt, A. and Detragiache, E. (1997), ‘The determinants of banking crises - evidence from developing and developed countries’, IMF Working Papers 97/106, International Monetary Fund.CrossRefGoogle Scholar
Diamond, D.W. and Dybvig, P.H. (1983), ‘Bank runs, deposit insurance, and liquidity’, Journal of Political Economy, 9, 3, pp. 401–19.Google Scholar
Duttagupta, R. and Cashin, P. (2008), ‘The anatomy of banking crises’, IMF Working paper 08/93.CrossRefGoogle Scholar
ECB (2009), EU Banking Sector Stability August 2009, Frankfurt, European Central Bank.Google Scholar
Elsinger, H., Lehar, A. and Summer, M. (2006), ‘Risk assessment for banking systems’, Management Science, 52, pp. 1301–14.CrossRefGoogle Scholar
Evans, G. (1991), ‘Pitfalls in testing for explosive bubbles in asset prices’, American Economic Review, 81, pp. 922–30.Google Scholar
Farhi, E. and Tirole, J. (2009), ‘Collective moral hazard, maturity mismatch and systemic bailouts’, NBER Working Paper, No. 15138.Google Scholar
Fell, J. and Schinasi, G. (2005), ‘Assessing financial stability - exploring the boundaries of analysis’, National Institute Economic Review, 192, pp. 70–85.CrossRefGoogle Scholar
Fernandez de Lis, S. and Herrero, A. (2009), ‘The Spanish approach: dynamic provisioning and other tools’, in Mayes, D., Pringle, R. and Taylor, M. (eds), Towards a New Framework for Financial Stability, Central Banking Publications.Google Scholar
Freixas, X. and Parigi, B. (1998), ‘Contagion and efficiency in gross and net interbank payment systems’, Journal of Financial Intermediation, 7, pp. 3–31.CrossRefGoogle Scholar
Freixas, X., Parigi, B. and Rochet, J.-C. (2000), ‘Systemic risk, interbank relations and liquidity provision by the central bank’, Journal of Money, Credit and Banking, 32, pp. 611–38.CrossRefGoogle Scholar
FSA (2009), The Turner Review. A Regulatory Response to the Global Financial Crisis, March, London.Google Scholar
Goodhart, C. (2005), ‘Financial regulation, credit risk and financial stability’, National Institute Economic Review, 192, pp. 70–79.CrossRefGoogle Scholar
Goodhart, C. (2008), ‘The boundary problem in financial regulation’, National Institute Economic Review, no. 206, January, pp. 48–55.CrossRefGoogle Scholar
Goodhart, C., Sunirand, P. and Tsomocos, D. (2006), ‘A model to analyse financial fragility’, Economic Theory, Springer, 27, pp. 107–42.Google Scholar
HM Treasury (2008), Financial Stability and Depositor Protection: Strengthening the Framework, January, London, HM Treasury.Google Scholar
Hoggarth, G. and Sapporta, V. (2001), ‘Costs of banking system instability, some empirical evidence’, Financial Stability Review, Summer, Bank of England.Google Scholar
IMF (2009), Global Financial Stability Report October 2009 - Navigating the Financial Challenges Ahead, Washington DC, International Monetary Fund.Google Scholar
Jayanti, S. and Whyte, A. (1996), ‘Global contagion effects of the continental Illinois failure’, Journal of International Financial Markets, Institutions and Money, 6, pp. 87–99.Google Scholar
Kaminsky, L.G. and Reinhart, C.M. (1999), ‘The twin crises; the causes of banking and balance-of-payments problems’, American Economic Review, 89, pp. 473–500.CrossRefGoogle Scholar
Kane, E. (1992), ‘Corporate capital and government guarantees’, Journal of Financial Services Research, 5, pp. 357–68.CrossRefGoogle Scholar
Kashyap, A., Rajan, B. and Stein, J. (2008), ‘Rethinking capital regulation’, paper presented at the Kansas Fed Symposium at Jackson Hole, Wyoming, August.Google Scholar
Kindleberger, C.P. (1978), Manias, Panics and Crashes, A History of Financial Crises, New York, Basic Books.CrossRefGoogle Scholar
Knight, F.H. (1921), Risk, Uncertainty and Profit, Boston, No. 16 in a series of rare texts in economics, republished by the LSE.Google Scholar
Kocherlakota, N. and Shim, I. (2006), ‘Forbearance and prompt corrective action’, BIS Working Paper No. 177, Bank of International Settlements.CrossRefGoogle Scholar
Mayes, D., Pringle, R. and Taylor, M. (eds) (2009), Towards a New Framework for Financial Stability, London, Central Banking Publications.Google Scholar
Minsky, H.P. (1977), ‘A theory of systemic fragility’ in Altman, E.I. and Sametz, A.W. (eds), Financial Crises, New York, Wiley.Google Scholar
Raymond Feingold, H. (2001), ‘Preventing crisis by testing for bubbles: a comparative study of the financial fragility of Europe relative to the USA and Japan’, EFMA 2001 Lugano Meetings, European Financial Management Association.CrossRefGoogle Scholar
Santor, E. (2003), ‘Banking crises and contagion: empirical evidence’, Working Papers 03-1, Bank of Canada.Google Scholar
Shin, H.S. (2008), ‘Risk and liquidity in a system context’, Journal of Financial Intermediation, 17, pp. 315–29.CrossRefGoogle Scholar
Warwick Commission (2009), The Warwick Commission on International Financial Reform, in Praise of Unlevel Playing Fields, Warwick University.Google Scholar
Weale, M. (2008), ‘Commentary: the banking crisis and the economy’, National Institute Economic Review, 204, April, p.7.CrossRefGoogle Scholar