Essays on Bank Regulation and Financial Institutions Post-2008 Crisis
Document information
| Author | Charlotte Werger |
| School | European University Institute |
| Major | Economics |
| Year of publication | 2016 |
| Place | Florence |
| Document type | thesis |
| Language | English |
| Number of pages | 130 |
| Format | |
| Size | 5.38 MB |
- bank regulation
- financial stability
- moral hazard
Summary
I. Introduction to Bank Regulation
The document explores the interaction between financial institutions and their regulators in the aftermath of the 2008 financial crisis. It emphasizes the importance of bank regulation in maintaining financial stability. The author, Charlotte Werger, presents a comprehensive analysis of how various factors, such as size, incentives, and moral hazard, influence the relationship between banks and regulatory bodies. The thesis posits that understanding these dynamics is crucial for developing effective regulatory frameworks. The findings suggest that larger banks often receive more support, reinforcing the too-big-to-fail narrative. This section sets the stage for a deeper examination of the implications of these interactions on the broader financial landscape.
1.1. Key Themes
The key themes identified in the document include financial stability, banking regulation, and the political influence of banks. Each theme is intricately linked to the overarching narrative of how banks operate within a regulated environment. The author highlights that the expectation of government support can lead to moral hazard, where banks engage in riskier behavior, believing they will be bailed out in times of distress. This section underscores the necessity for regulators to understand these themes to mitigate risks effectively.
II. Size and Support Ratings of U
The first chapter delves into the correlation between bank size and support ratings. It confirms the hypothesis that larger banks tend to receive higher support ratings, which is a critical insight for regulators. The analysis reveals a non-linear relationship, suggesting that as banks grow, their perceived importance to the financial system increases, leading to a greater likelihood of receiving government assistance. This finding is pivotal in understanding the regulatory treatment of banks, especially during crises. The chapter also discusses the implications of this relationship for financial stability, emphasizing the need for a balanced approach to regulation that considers the size and systemic importance of financial institutions.
2.1. Implications for Regulation
The implications of the findings in this chapter are significant for regulatory practices. Regulators must consider the size of banks when formulating policies to ensure that support mechanisms do not inadvertently encourage moral hazard. The chapter advocates for a regulatory framework that addresses the risks associated with large banks while promoting a competitive environment for smaller institutions. This balance is essential for fostering a resilient financial system that can withstand future shocks.
III. Bailouts and Moral Hazard
The second chapter examines the concept of bailouts and their relationship with moral hazard. It argues that the expectation of government support can lead banks to take on excessive risks, undermining the principles of sound banking practices. The analysis highlights that banks perceived as likely to receive bailouts tend to be more leveraged and invest in riskier assets. This behavior poses a threat to financial stability, as it can lead to systemic risks within the banking sector. The chapter calls for a reevaluation of bailout policies to mitigate the adverse effects of moral hazard and ensure that banks operate within a framework of accountability.
3.1. Policy Recommendations
To address the issues of moral hazard, the chapter proposes several policy recommendations. These include implementing stricter capital requirements for banks, enhancing transparency in banking operations, and establishing clear guidelines for government support during crises. By adopting these measures, regulators can reduce the likelihood of banks engaging in reckless behavior, thereby promoting a more stable financial environment. The recommendations aim to create a regulatory landscape that discourages reliance on government bailouts and encourages prudent risk management.
IV. Political Influence and Regulatory Treatment
The final chapters focus on the political activities of banks and their impact on regulatory treatment. The findings indicate that banks with strong political connections often receive favorable treatment from regulators, which raises concerns about the integrity of the regulatory process. The analysis reveals that lobbying efforts and political affiliations can significantly influence the supervisory actions taken against distressed banks. This section emphasizes the need for regulators to be aware of these dynamics to ensure that regulatory decisions are made based on sound economic principles rather than political considerations.
4.1. Enhancing Regulatory Independence
To counteract the influence of politics on regulatory decisions, the document advocates for enhancing the independence of regulatory bodies. This can be achieved through measures such as establishing clear boundaries between political influence and regulatory oversight, ensuring that regulatory decisions are based on objective criteria. By fostering an environment where regulators can operate free from political pressures, the integrity of the financial system can be safeguarded, ultimately benefiting the economy as a whole.
Document reference
- Bank Regulation in a Post-Financial Crisis Landscape: Essays of the Interaction Between Financial Institutions (Charlotte Werger)
- Bailouts and Moral Hazard: How Implicit Government Guarantees Affect Financial Stability (Charlotte Werger)
- Between Capture and Discretion - The Determinants of Distressed Bank Treatment and Expected Government Support (Charlotte Werger)
- Size and support ratings of U.S. banks (Charlotte Werger)
- Determinants of Bank Lobbying (Charlotte Werger)