Hostname: page-component-cd9895bd7-fscjk Total loading time: 0 Render date: 2024-12-29T06:43:09.430Z Has data issue: false hasContentIssue false
  • English
  • Français

The Boundary Problem in Financial Regulation

Published online by Cambridge University Press:  26 March 2020

Charles Goodhart
Charles Goodhart*
Affiliation:
Financial Markets Group, London School of Economics
*
e-mail [email protected]
Get access Rights & Permissions [Opens in a new window]

Abstract

The current financial crisis has raised queries about the adequacy of the present regulatory regime. Whilst the immediate priority may be to plug the obvious holes in the system, there are some long-term generic problems with almost any system of financial regulation. This paper explores one such concern, i.e. the boundary problem. This arises because effective regulation, one that actually bites, is likely to penalise those within the regulated sector, relative to those just outside, causing substitution flows towards the unregulated. This boundary problem impacts on many proposals, such as ‘narrow banking’ and my own, with Avinash Persaud, for state and time-varying capital adequacy requirements. The question of how and where to set the boundary is considered. Such boundaries will always be criticised as leading to disintermediation, competitive inequality (no level-playing-field), inefficiency and higher spreads and borrowing rates; and such criticisms will be valid up to a point. The paper ends by discussing how best to respond.

Keywords

RegulationboundarydisintermediationE58G18G28
Type
Research Article
Information
National Institute Economic Review , Volume 206 , October 2008 , pp. 48 - 55
Copyright
Copyright © 2008 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

∗

I am grateful to Gavin Bingham, Vitor Gaspar, Eva Hupkes, Paul Mizen, Avinash Persaud and Martin Weale for discussion and helpful comments. All remaining errors are, however, my own responsibility.

References

Danielsson, J., Embrechts, P., Goodhart, C., Keating, C., Muennich, F. and Shin, H.S. (2001), ‘An academic response to Basel II’, LSE Financial Markets Group Special Paper No. 130.Google Scholar
Danielsson, J., Shin, H.S., and Zigrand, J.-P. (2004), ‘The impact of risk regulation on price dynamics’, Journal of Banking and Finance, 28(5), pp. 1069–87.CrossRefGoogle Scholar
De Lis, S.F., Pagés, J.M. and Saurina, J. (2000), ‘Credit growth, problem loans and credit risk provisioning in Spain’, Banco de España, Servicio de Estudios, Documento de Trabajo no. 0018.Google Scholar
Goodhart, C., Hofmann, B. and Segoviano, M. (2004), ‘Bank regulation and macroeconomic fluctuations’, Oxford Review of Economic Policy, 20(4), pp. 591–615.CrossRefGoogle Scholar
Goodhart, C. and Persaud, A. (2008a), ‘A party pooper's guide to financial stability’, Op. Ed., Financial Times, 4 June.Google Scholar
-(2008b), ‘A proposal how to avoid the next crash’, Op. Ed., Financial Times, 30 January.Google Scholar
Goodhart, C., and Segoviano, M. (2004), ‘Basel and procyclicality: a comparison of the standardised and IRB approaches to an improved credit risk method’, Financial Markets Group Discussion Paper 524, London School of Economics, October.Google Scholar
Goodhart, C., and Taylor, A. (2006), ‘Procyclicality and volatility in the financial system: the implementation of Basel II and IAS 39’, in Gerlach, S. and Gruenwald, P. (eds), Procyclicality of Financial Systems in Asia, Palgrave Macmillan (based on IMF/ HKIMR seminar on Managing Procyclicality in the Financial System: Experiences in Asia and Policy Options, 2004, Hong Kong).Google Scholar
Hüpkes, E. (2004), ‘Protect functions, not institutions’, The Financial Regulator, Vol. 9, in Evanoff, D. and Kaufman, G. (eds), Systemic Financial Crisis: Resolving Large Bank Insolvencies, World Scientific Publishing Co. Pte. Ltd., 2005.Google Scholar
Telser, L.G. (2008), ‘Securing the means of payment: the ultimate requisite of a modern economy’, The Economists' Voice, http://www.bepress.com/ev, August 21.Google Scholar