Micro- and Macro-Prudential Supervision: Is the Present Model of Financial Regulation Destructive?

Abstract

Banking regulation has undergone substantial reforms after the 2008 financial crisis. In spite of these developments, European banks, especially, continue to experience serious difficulties. Central banks still operate in crisis mode and banks do not serve as intermediaries aimed at providing markets with sufficient liquidity. Stress tests prove inadequate. Capital adequacy rules requiring banks to rebuild capital at the bottom of the market are counterproductive and the new liquidity requirements constrain the business further. Modern bank rescue and resolution regimes are ineffective and may promote early bank runs and bail-out mechanisms are reinstated. A different approach is needed, and this paper analyses whether macro-prudential supervision can provide answers and how it should be designed to provide solutions. It is an elaboration of the Peter Ellinger Public Lecture given in Singapore in Sept. 2016.