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One of the main issues that remain to be defined in the implementation of the recent Basel III agreement pertains to the attempt to reinforce the macro-prudential orientation of the existing banking regulatory regime.
In particular, the paper analyses the study recently presented by the BIS regarding the policy options (see paper by Drehmann, Borio and Tsatsaronis paper). Borrowing some standard protocols that are routine in medicine, meteorology and other sciences, Jordà discusses what indicators should be used to determine appropriate capital requirements.
Òscar Jordà said: Ideally, one would formulate a dynamic stochastic general equilibrium model of the economy with a detailed characterisation of how a heterogeneous financial sector affects real activity, how systemic risk can build up and wane, how capital regulation interacts with economic growth, and whether it can be crafted to smooth the financial cycle and prevent financial events. But we are far from having such an understanding, and in the meantime the design of a supervisory framework that can meet real and pressing needs must rely primarily on a careful statistical analysis of the data.