CEPR's Dewatripont/Praet/Sapir: The authors suggest it should be accompanied by further efforts to increase loss-absorbency and liquidity requirements, supervision, and managerial accountability in order to reduce moral hazard...
The events of the last two months have demonstrated the importance of a banking regulation ecosystem which combines (i) flexibility to deal efficiently with a bank in crisis in order to avoid financial instability, and (ii) enough preventive measures to lower the probability of crises while also limiting moral hazard.
Recently, several banks have been under stress and, so far, four in the US and one in Switzerland have needed public intervention. Each time, money from deposit insurance funds and/or the treasury has been used, and the problem bank has ‘disappeared’. Moreover, even in the case of a globally systemically important bank (GSIB) like Crédit Suisse, authorities went for absorption of the entire bank by an even larger one.
Evaluations of the events differ. Some are rather positive, stressing that financial instability was avoided (Löyttyniemi 2023). Others, however, are outright negative, stressing in particular the ‘unsustainability’ of megabanks overlapping multiple jurisdictions (Brunetti 2023, Admati et al. 2023). Both sides make valid points in our view...
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