Financial regulation in a system context

Stephen Morris, Hyun Song Shin

Research output: Contribution to journalArticle

63 Scopus citations

Abstract

The global financial crisis raises questions about the proper objectives of financial regulation and how best to meet them. Traditionally, capital requirements have been the cornerstone of bank regulation. However, the run on the investment bank Bear Stearns in March 2008 led to its demise even though Bear Stearns met the letter of its regulatory capital requirements. The risk-based capital requirements that underpin the Basel approach to bank regulation fail to distinguish between the inherent riskiness of an asset and its systemic importance. Liquidity requirements that constrain the composition of assets may be a necessary complement. A maximum leverage ratio-an idea that has gained favor in the United States and more recently in Switzerland-may also prove beneficial, deriving its rationale not from the traditional view that capital is a buffer against losses on assets, but rather from the importance of stabilizing liabilities in an interrelated financial system.

Original languageEnglish (US)
Pages (from-to)229-261
Number of pages33
JournalBrookings Papers on Economic Activity
Issue number2
StatePublished - Jan 1 2008

All Science Journal Classification (ASJC) codes

  • Business, Management and Accounting(all)
  • Economics and Econometrics

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    Morris, S., & Shin, H. S. (2008). Financial regulation in a system context. Brookings Papers on Economic Activity, (2), 229-261.