1 / 16

Financial Regulation

Financial Regulation. Ivan J Kirov Fed Challenge Feb 4 2010. Paths Taken and Paths Forward. The Financial System. Financial Institutions Solve informational asymmetry Leverage economies of scale. Banks are Businesses, Too. Bank “Self-Regulation” At sign of trouble: Creditors pull out

tanner
Download Presentation

Financial Regulation

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. Financial Regulation Ivan J Kirov Fed Challenge Feb 4 2010 Paths Taken and Paths Forward

  2. The Financial System • Financial Institutions • Solve informational asymmetry • Leverage economies of scale

  3. Banks are Businesses, Too • Bank “Self-Regulation” • At sign of trouble: • Creditors pull out • Depositors withdraw • Difficult to raise money in capital markets • Hence capital kept on hand

  4. …Then again, maybe not • Finance is systemically important to the functioning of the economy

  5. Government Intervenes • Liquidity (Lender of last resort) • Traditional purview of central banks • Deposit insurance • In US, from Depression • Creditor guarantees • Mostly from last crisis • AIG • Citi

  6. Moral Hazard • Guarantees reduce risk in holding bank debt • Moreover, they insulate creditors from loss • Risk-taking proliferates • Financial institutions’ incentives become out of line with those of regulators Banks’ Equity as % of Assets Source: Economist

  7. Animal Spirits Contained • To avoid moral hazard implicit in support, governments impose financial regulatory structures

  8. Basel-2 • Basel-2: Current main international regulatory framework • Financial institutions must keep on hand at least 4% of risk-weighted assets • “On hand”: Tier-1 capital • “Risk-weighted”: According to GAAP, but in practice a firm-specific definition • Problems • Tier-1 capital includes debt-like instruments • Low capital margin • Limited regulation of leverage

  9. New Regulatory Proposals • Tobin Tax • Britain’s Bonus Tax • Obama’s Bank Levy • The Volcker Rule • Basel-3

  10. Tobin Tax • Originated by James Tobin in 1973 • FX transactions above “optimal level” – tax to bring them in line with public optimum. • Financial Tobin Tax is not strictly a form of regulation; more like enforced downsizing. • Problems: • How do governments know finance’s “optimal size”?

  11. Britain’s Bonus Tax • Dec. 10, 2009: UK gov’t imposes 50% tax rate on bank bonuses exceeding £25,000 • Largely politically motivated

  12. Obama’s Bank Levy • Tax on financial firms with >$50 billion in assets • Would raise $90bn over 10 years • To cover TARP fund • Applies mostly to risky activities • Proprietary trading desks • In practice: small, symbolic • Principle? Source: New York Times

  13. Volcker Rule • Semi-reinstatement of Glass-Steagall • Banks (or just deposit-taking institutions?) cannot engage in proprietary trading or invest in hedge funds or PE funds • Details still pending Congressional crucible Source: New York Times

  14. Basel-3 • Work-in-progress: refinement of Basel-2 rules • General thrust • Safe “Tier 1” capital more narrowly defined (mostly only equity) • Financial institutions cannot use proprietary risk models • Liquidity: banks must withstand 30-day credit freeze • Capital requirements increased to 6-8% of risk-adjusted assets

  15. Paths forward? • Liquidity regulation • Institutions pay for not-so-implicit guarantees • “Convertible capital” • Balance between institution-specific and system-wide regulation

  16. A Little Fun • Julian Simon: The Dismal Science? • “One can hardly imagine, I think, how poor we would be today were it not for the rapid population growth of the past to which we owe the enormous number of technological advances enjoyed today. . . . If I could re-do the history of the world, halving population size each year from the beginning of time on some random basis, I would not do it for fear of losing Mozart in the process.” -Edmund S. Phelps

More Related