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Financial Regulation, Credit Risk and Financial Stability

Published online by Cambridge University Press:  26 March 2020

C. A.E. Goodhart
C. A.E. Goodhart*
Affiliation:
Financial Markets Group, London School of Economics and Political Science
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Abstract

In contrast to recent successful developments in macro monetary policies, the modelling, measurement and management of systemic financial stability has remained problematical. Indeed, the focus of most effort has been on improving individual, rather than systemic, bank risk management; the Basel II objective has been to bring regulatory bank capital into line with the (sophisticated) banks‘ assessment of their own economic capital. Even at the individual bank level there are concerns over (i) appropriate diversification allowances, (ii) differing objectives of banks and regulators, (iii) the need for a buffer over regulatory minima, and (iv) the distinction between expected and unexpected losses (EL and UL). At the systemic level the quite complex and prescriptive content of Basel II raises dangers of ‘endogenous risk’ and procyclicality. Simulations suggest that this latter could be a serious problem.

Keywords

Financial regulationsystemic stabilitycredit riskcapital adequacy requirementsBasel IIoperational riskinternal risk based modelsprocyclicalityendogenous riskE4E44E5E55G2G21G28
Type
Articles
Information
National Institute Economic Review , Volume 192 , April 2005 , pp. 118 - 127
Copyright
Copyright © 2005 National Institute of Economic and Social Research

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Footnotes

My thanks are due to Jon Danielsson, Andy Mullineux, Miguel Segoviano, Ashley Taylor and Geoffrey Wood for help and advice in preparing this article, but responsibility remains with me.

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