Con Keating and Barry Marshall: Macro-Prudential Liquidity-Based Regulation
07 July 2010
In this paper, the authors argued that criticisms of bank regulation are manifold. Moreover, a wide range of possible further regulation is now being promoted and debated, but agreement has emerged that macro-prudential regulation is required to complement the existing micro-prudential regime.
Criticisms of bank regulation are manifold. The existing regime is widely perceived to have failed, with many aspects of the crisis often cited as supporting evidence. A wide range of possible further regulation is now being promoted and debated, but agreement appears to have emerged that some form of macro-prudential regulation is required to complement the existing micro-prudential regime.
For the past two decades financial regulation has been characterised as internationally agreed and “risk-based”. Both of these aspects can be criticised. Risk is unobservable. In fact, the compact between bankers and supervisors could not be written as a complete formal contract based upon it. A further difficulty with risk-based regulation, as currently practiced, is that this is risk from the perspective of the financial institution, which may differ greatly from that of society more broadly.
The objections to internationally agreed regulation have tended to focus upon the compromises made in their negotiation, or upon differences in national implementation of agreed principles and rules. However, macro-prudential regulation is intrinsically a far more national affair than micro-prudential; when the demographics and wealth of nations vary greatly, the societal preferences for particular institutional structures and systemic risk in their financial systems and economy should also differ, often significantly.
