Regulatory Reform : Integrating Paradigms

The Subprime crisis largely resulted from failures to internalize systemic risk evenly across financial intermediaries and recognize the implications of Knightian uncertainty and mood swings. A successful reform of prudential regulation will need to integrate more harmoniously the three paradigms of moral hazard, externalities, and uncertainty. This is a tall order because each paradigm leads to different and often inconsistent regulatory implications. Moreover, efforts to address the central problem under one paradigm can make the problems under the others worse. To avoid regulatory arbitrage and ensure that externalities are uniformly internalized, all prudentially regulated intermediaries should be subjected to the same capital adequacy requirements, and unregulated intermediaries should be financed only by regulated intermediaries. Reflecting the importance of uncertainty, the new regulatory architecture will also need to rely less on markets and more on "holistic" supervision, and incorporate countercyclical norms that can be adjusted in light of changing circumstances.

Bibliographic Details

Main Authors:	de la Torre, Augusto, Ize, Alain
Language:	English
Published:	2009-02-01
Subjects:	ACCOUNTABILITY, ACCOUNTING, ADVERSE SELECTION, AGENCY PROBLEM, AGENCY PROBLEMS, ARBITRAGE, ASSET MANAGERS, ASSET PRICE, ASSET PRICES, ASYMMETRIC INFORMATION, BAILOUTS, BALANCE SHEET, BALANCE SHEETS, BANK EARNINGS, BANK FAILURE, BANK FAILURE RESOLUTION, BANKING SECTOR, BANKING SYSTEM, BID, BORROWER, BROKERAGE, BROKERAGE ACTIVITIES, BROKERS, BUSINESS CYCLE, BUSINESS OPPORTUNITIES, CAPITAL ADEQUACY, CAPITAL FLOWS, CAPITAL MARKET, CAPITAL MARKETS, CAPITAL RATIOS, CAPITAL REQUIREMENTS, CENTRAL BANK, CENTRAL BANKS, CHANNEL OF FINANCE, COLLECTIVE ACTION, COMMERCIAL BANKING, COMMERCIAL BANKS, CONSOLIDATED SUPERVISION, CONSUMER PROTECTION, CONTRACT ENFORCEMENT, COORDINATION FAILURE, COORDINATION FAILURES, CREDIT CHAIN, CREDIT DEFAULT, CREDIT DEFAULT SWAPS, CREDIT DERIVATIVES, CREDIT ENHANCEMENTS, CREDIT LINES, CREDIT MARKET, CREDIT RISK, CREDIT RISK EXPOSURES, CREDITWORTHY BORROWERS, DEBT, DEBT CONTRACTS, DEPOSIT, DEPOSIT INSURANCE, DEPOSIT RATES, DEPOSITOR, DEPOSITORS, DEPOSITS, DEREGULATION, DERIVATIVE, DERIVATIVE CONTRACTS, DERIVATIVE MARKETS, ECONOMIC CONDITIONS, EFFECTIVE GOVERNANCE, EQUITY INVESTMENTS, EQUITY SWAPS, EXCHANGE RATE, EXPOSURE, EXTENSION OF CREDIT, EXTERNALITIES, FAIR VALUE, FEDERAL RESERVE, FEDERAL RESERVE SYSTEM, FINANCIAL CONGLOMERATES, FINANCIAL CONTRACTS, FINANCIAL CRISES, FINANCIAL CRISIS, FINANCIAL DEEPENING, FINANCIAL DEVELOPMENT, FINANCIAL DEVELOPMENTS, FINANCIAL DISTRESS, FINANCIAL FLOWS, FINANCIAL INNOVATION, FINANCIAL INSTITUTIONS, FINANCIAL INTERMEDIARIES, FINANCIAL MANAGEMENT, FINANCIAL MARKET, FINANCIAL MARKET PARTICIPANTS, FINANCIAL MARKETS, FINANCIAL REGULATION, FINANCIAL SECTOR, FINANCIAL STABILITY, FINANCIAL SYSTEM, FINANCIAL SYSTEMS, FRAUD, GOVERNANCE ISSUES, GOVERNANCE STANDARDS, GOVERNMENT INTERVENTION, HEDGE FUNDS, HOLDING, HOUSING, HOUSING FINANCE, HOUSING PRICES, INFLATION, INFORMATION ASYMMETRY, INFORMED INVESTORS, INSTRUMENT, INSURANCE, INSURANCE COMPANIES, INTEREST RATE, INTEREST RATES, INTERNATIONAL BANK, INTERNATIONAL ECONOMICS, INVESTING, INVESTMENT BANKING, INVESTMENT BANKS, INVESTMENT OPPORTUNITIES, INVESTMENT VEHICLES, INVESTOR PROTECTION, LEGISLATION, LENDER-OF-LAST-RESORT, LENDERS, LEVY, LIMITED LIABILITY, LIQUID ASSETS, LIQUID SECONDARY MARKETS, LIQUIDITY, LIQUIDITY CRISES, LIQUIDITY FACILITIES, LIQUIDITY RISK, LOAN, MALFEASANCE, MANDATES, MARKET DEVELOPMENT, MARKET DISCIPLINE, MARKET FAILURE, MARKET FAILURES, MARKET LIQUIDITY, MARKET PARTICIPANTS, MARKET PLAYERS, MARKET RISKS, MARKET VALUES, MARKET-MAKING, MATURITY, MATURITY GAP, MATURITY MISMATCHES, MATURITY STRUCTURE, MONETARY AUTHORITIES, MONETARY POLICY, MORAL HAZARD, MORTGAGE, MORTGAGE LENDING, MORTGAGE-BACKED SECURITIES, MORTGAGES, MUTUAL FUNDS, NEW MARKETS, OPPORTUNISTIC BEHAVIOR, OVERNIGHT REPOS, PENSION, PENSION FUNDS, POLICY RESPONSES, PORTFOLIO, PORTFOLIOS, PRICE RISK, PRICE VOLATILITY, PRINCIPAL-AGENT PROBLEM, PRINCIPAL-AGENT PROBLEMS, PRUDENTIAL REGULATION, PRUDENTIAL REGULATIONS, PRUDENTIAL REQUIREMENTS, PRUDENTIAL STANDARDS, PUBLIC FUNDS, PUBLIC LENDER, PUBLIC POLICY, RATING AGENCIES, REAL SECTOR, REGULATOR, REGULATORS, REGULATORY FORBEARANCE, REGULATORY FRAMEWORK, REGULATORY REQUIREMENTS, REPAYMENT, REPAYMENTS, REPUTATION, RETURNS, RISK AVERSION, RISK MANAGEMENT, RISK MANAGERS, RISK PREMIUM, RISK TAKING, RISK WEIGHT, RISK WEIGHTS, RISKY ASSETS, SAFETY NET, SALE OF MORTGAGE, SAVINGS, SECURITIES, SECURITIES MARKET, SECURITIES MARKETS, SHAREHOLDERS, SHORT-TERM LIABILITIES, SMALL BORROWER, SOCIAL COST, SOCIAL COSTS, SOCIAL RISKS, STOCK MARKET, STOCK MARKET PRICE, STOCK PRICES, STOCK TRADING, STOCKS, SWAP, SYSTEMIC RISK, SYSTEMIC RISKS, TRADING, TRADITIONAL BANKING, TRANCHES, TRANSACTION, TRANSACTION COSTS, TRANSPARENCY, TREASURY, UNDERLYING ASSET, UNIVERSAL BANKING, VALUATIONS, WHOLESALE FINANCE, WHOLESALE INVESTORS,
Online Access:	http://www-wds.worldbank.org/external/default/main?menuPK=64187510&pagePK=64193027&piPK=64187937&theSitePK=523679&menuPK=64187510&searchMenuPK=64187283&siteName=WDS&entityID=000158349_20090504085341 https://hdl.handle.net/10986/4118
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