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International Financial Regulation for Crisis Prevention in Middle-Income Countries

Examining the efficacy of new international financial regulation in preventing crises, with implications for middle-income countries such as managing risk, capital allocation, and regulatory challenges. Basel 3, Dodd-Frank Act, and policy suggestions for MICs are discussed.

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International Financial Regulation for Crisis Prevention in Middle-Income Countries

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  1. Does new international regulation help crisis prevention? Implications for Middle Income Countries? Stephany Griffith-Jones, sgj2108@columbia.edu Shari Spiegel and Matthias Thiemann

  2. Overall context • Aims of the financial system • Managing risk and avoiding crisis • Allocating capital to the real economy efficiently • Financial system did neither

  3. Some key problems • One problem: OTD-model with its increased leverage and maturity mismatches which increase systemic risk • Crisis revealed too low core capital, leverage too high and • Both accounting and regulation was pro-cyclical

  4. Basel 3 • Size and qualitio of core capital improved (but is it enough?) • Simple leverage ratio 1:30 (problematic) • Counter-cyclical regulation • Liquidity coverage ratio positive

  5. Implications for middle income countries • Several elements of Basel 3 positive, such as countercyclical buffers and liquidity ratios; increasing quantity and quality of core capital if needed • Too slow and gradual introduction of reforms desirable to accelerate in MIC‘s?

  6. Dodd-Frank Act • More rigorous than initially expected, but weakened by lobbying, e.g. Volcker rule and derivatives, further diluted in implementation • Positive institutional developments: consumer protection agency (prevents abuse) and systemic risk regulator also in EU (prevents silo-thinking about systemic risk) • both relevant for MICs

  7. Policy suggestions MIC‘s may wish to consider • Counter-cyclical regulations • Prevent large currency and maturity mismatches • Possible increase of quantity and quality of core capital • Putting all transactions on the balance sheet • Forcing derivatives on exchanges • Require foreign banks to have subsidiaries and not branches

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