Regulatory Failure and the Global Financial Crisis

Regulatory Failure and the Global Financial Crisis

An Australian Perspective

Edited by Mohamed Ariff, John H. Farrar and Ahmed M. Khalid

This fascinating book presents a lively discussion of key issues resulting from the recent financial crisis. The expert contributors explore why the global financial crisis occurred, how it destroyed wealth, triggered mass unemployment and created an unprecedented loss of control on employment, monetary policy and government budgets.

Chapter 12: Regulatory Lessons from the Global Financial Crisis

Jeffrey Carmichael

Subjects: economics and finance, financial economics and regulation


1 Jeffrey Carmichael 12.1 INTRODUCTION The global financial crisis of 2008 (the crisis) was one of the most dramatic events of this century in that it took the global financial and economic systems to the brink of disaster. Without extensive intervention by major governments, it is likely that the rippling effects of bank failures could have frozen financial markets completely. The lessons from this period, which will be debated for decades, range from public policy issues, to the role of financial institutions, to the appropriate role of regulation. This chapter focuses on the last of these and, indeed, on just two regulatory issues: first, the importance of regulatory architecture in avoiding crises in section 12.2; and second, the need for reforms in the tools and methods of prudential regulation in section 12.3. Thereafter, sections 12.4 and 12.5 address the lessons for reform actions. Section 12.6 explores the special cases of the Basel Committee and Australia before concluding this chapter in section 12.7. 12.2 LESSONS ABOUT REGULATORY ARCHITECTURE The term ‘regulatory architecture’ refers to the number of agencies with regulatory responsibilities and the allocation of responsibilities among them.2 Whereas there was little discussion about architecture as recently as 20 years ago, the past two decades have seen it become one of the more hotly debated topics in the field of regulation. The same period has seen a marked trend towards amalgamation of regulatory agencies in many countries. According to the World Bank the dominant architecture has shifted in this period from...

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