Reforming the financial system Flashcards
2 types of ways to deal with the financial sector
regulation and supervision
both have become more rigorous and applied to a wider range of institutions since the financial crisis
type of supervision
micro-prudential: supervision of individual banks
macro-prudential: supervision of the financial system as a whole
since the crisis, there has been a shift from micro to a mix of micro and macro
who carries out the supervision
in the uk, it’s the central bank
it has a:
monetary policy committee
prudential regulation authority (micro-prudential)
financial policy committee (macro-prudential)
protecting deposits
many banks have a commercial banking side and an investment banking side
the uk has “ring-fencing”, which means that deposits can only be used for loans and not for investment banking. This may be ineffective due to the fact that banks are interdependent.
the usa has the Volcker Rule, which states that commercial banks should not have an investment banking side at all
capital requirements
requiring banks have a certain amount of capital (ratio or leverage ratio), so they’re less likely to have their capital wiped out and become insolvent
however, this would increase costs for banks, and therefore make them reluctant to lend, so they have been lobbying to prevent capital requirements from being too high
increasing capital requirements must therefore happen gradually
smaller banks
cap on bank sizes so no bank is “too big to fail”
unlikely to happen, but having higher capital requirements may lead to some banks becoming smaller
compensation reform
making banking no longer risk asymmetric
taking back bonuses if decisions from years ago turn out badly
the amount bankers are currently paid exacerbates inequality
responsibility reform
making heads of banks take responsibility for what goes on in them
(more focused on rigging and frauds)
