Archive for the ‘Bank regulation’ Category

This is the title of an article written with my colleague, Tim Congdon (Institute of International Monetary Research and University of Buckingham), published in CityAM on 27/10/2017.

Our main point is that more regulation won’t make banks safer and is counterproductive. It is a sort of an instinctive reaction by politicians, policy-makers and regulators to respond to a crisis with more and tighter regulation, in an effort to tackle the ‘excesses’ in the market economy left of its own will. This is both very naive and irresponsible, as much as empirically and theoretically wrong. The recent announcement and approval of the Basell III tighter bank capital ratios is an example of it: this tougher set of regulations was announced and approved in the midst of a severe financial crisis (2008-2010), and resulted in banks shrinking their balance sheets even more; with the expected dramatic fall in money growth and nominal spending.

It is again a dire example of the running of the law of the unintended consequences of regulation; which would recommend the need to assess in advance the expected consequences of regulation, rather than quickly and desperately calling for more and tougher laws on banks and the rest of the financial system.

As we put it in the article:

Far too many people believe that “better” regulation is the answer to financial crises. But further regulation involves an expansion of the power of the state, and a loss of freedom for the financial system. Remember that Britain had no explicit official rules on bank capital until the 1980s, yet no British bank suffered a run on its deposits over the preceding century. Crucial to the success of British banking in the decades before the Northern Rock fiasco was the Bank of England’s willingness to lend to solvent banks if they were having difficulty funding their assets. Good central banking helped Britain’s commercial banks to run their businesses efficiently and profitably, and to the benefit of their customers.’

There was a time, not that far away, when regulation was not that prominent and financial markets flourished; and when a banking institution failed, that occasionally they did, there were solid policies and institutions willing to intervene in an decisively and orderly manner (the Bank of England had been an example of that, at least until the collapse of Norther rock in the recent crisis).

You will find the article in full here: http://www.cityam.com/274672/tighter-bank-regulation-wont-stop-boom-and-bust-but-damage.

Comments, even more if critical, most welcome!

Juan Castañeda

PS. We will be discussing these issues with the member of the Bank of England’ s Financial Policy Committee, Martin Taylor, in the IIMR Annual Public Lecture on the 7/10 in London: https://www.mv-pt.org/events/public-lecture-the-committee-of-public-safety-the-work-of-the-financial-policy-committee-by-m




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This is the title of the second research paper published by the Institute of International Monetary Research (IIMR), by Adam Ridley. This is a brief summary extracted from the paper, which is fully available at http://www.mv-pt.org/research-papers:

‘Output growth in the leading Western economies has been weaker since the Great Recession of 2008 and 2009 than at any time since the 1930s. According to the International Monetary Fund’s database, advanced economies’ gross domestic product was flat in 2008 and dropped by 3.4 per cent in 2009. Although 2010 enjoyed a rebound with 3.1 per cent growth, the next three years saw output advancing typically by a mere 1 ½ per cent a year. This was well beneath the pre-2008 trend.

In the leading Western nations the official response to the Great Recession has had a number of well-known and familiar common features, although policy has been far from stable or easy to predict. The elements of this response constitute what might be termed the “New Regulatory Wisdom” (NRW). How is to be defined? What has been its impact so far? And what will be its effects if it is maintained into the future?’


Video on changes in bank regulation during and after the Global Financial Crisis

You can also find a video below with further insights on this fundamental topic to understand the collapse in broad money growth in the midst of the Global Financial Crisis, and thus the aggravation of the crisis. The effects of tightening bank capital regulation are quite straight forward; in order to comply with higher capital to assets ratios, banks would have to sell their assets and thus reduce the amount of deposits (bank money) in the economy. This means a contraction in banks’ balance sheets and in turn a fall in deposits (broad money). The effects of such contractionary regulation is addressed in detail in Money in the Great Recession (Ed. Tim Congdon. 2017). In view of recent proposals to even increase capital ratios further the IIMR will hold a conference in this topic in november 2017 (more information with the programme and speakers to follow after the summer)

Comments welcome.

Juan Castañeda


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