Edited by Andrew W. Mullineux and Victor Murinde
Chapter 16: Some Lessons for Bank Regulation from Recent Financial Crises
16. Some lessons for bank regulation from recent ﬁnancial crises David T. Llewellyn* 1 INTRODUCTION AND OUTLINE Our objective is to consider the experience of recent banking crises in both developed and developing countries, and to draw lessons most especially with respect to the regulation and supervision of banks, and the design of an optimum ‘regulatory regime’. This will be done by setting out a series of general principles designed to lower the probability of banking distress. Just as the causes of banking crises are multidimensional, so the principles of an eﬀective regulatory regime also need to incorporate a wider range of issues than externally imposed rules on bank behaviour. What will be termed a ‘regulatory regime’ also includes the arrangements for intervention in the event of bank distress and failures. This is because they have incentive and moral hazard eﬀects which potentially inﬂuence future behaviour of banks and their customers and the probability of future crises. The focus of the chapter is a consideration of alternative approaches to achieving the objectives of regulation: systemic stability and consumer protection. A central theme is that what are often regarded as ‘alternatives’ are in fact complements within an overall regulatory strategy. As the regulatory regime is wider than the rules and monitoring conducted by regulatory agencies, the skill in constructing a regulatory strategy lies in how the various components of the regime are combined. When a particular regulatory problem emerges, the instinct of a regulator is often to create...
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