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Financial Crisis Containment and Government Guarantees

Financial Crisis Containment and Government Guarantees

Edited by John Raymond LaBrosse, Rodrigo Olivares-Caminal and Dalvinder Singh

Financial Crisis Containment and Government Guarantees analyses the international community’s commitment to forging enhanced, well thought-out, mechanisms for containing systemic risks in the context of a highly interconnected global financial framework which incorporates ongoing financial innovation.

Chapter 3: Powers and scope of the macro-prudential authority

Charles A.E. Goodhart

Subjects: economics and finance, financial economics and regulation, money and banking, law - academic, finance and banking law


The onset of the financial crisis, which began in mid-2007 and is still with us, led to a general realisation that there had been a missing link in the overall structure of financial regulation. Monetary policy had focused (successfully) on price stability and general macroeconomic stability. But this was not enough to ensure financial stability; indeed it might even be inimical to it, as Minsky had warned in 1977, 1982 and 1986. Micro-prudential regulation, as promulgated internationally by the Basel Committee on Banking Supervision and operated nationally by a variety of official organisations, some within and mostly without their national Central Banks, had focused unduly on the conditions and prospects of the individual financial intermediary, in particular the individual bank. Far too much weight was attached to the achievement and implementation of the Basel II Capital Accord for individual banks (and in the US for the large investment houses). Particularly in conjunction with the increasing application of mark-to-market accounting, the regulatory apparatus had allowed the financial system as a whole to become dangerously procyclical. Leverage increased in many countries and in many guises. Not only did regulators fail to appreciate the lurking dangers, but so did markets, as illustrated by the decline in major bank CDS rates to their low point in early 2007.

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