banking regulation after the crisis prof. dr. volbert alexander goethe university frankfurt...

Banking Regulation after the Crisis

Prof. Dr. Volbert AlexanderGoethe University Frankfurt

(Germany)

Bank of Greece, Athens April 2011

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Ethics in Finance Banking Regulation after the Crisis

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Banking regulation after the crisis became a dominant problem in thepresent discussions. Many proposals are launched with the central focus on the question: How can future crises be avoided by prudent macro- and microeconomic regulations ?

Presentation is concentrated on the following issues: (1) The Situation of the Banking Sector after the Crisis (2) Implemented and Planned Regulations According to Basel III (3) Neglected Problems (4) Summary and Conclusions The analysis is concentrated on the discussion in Europe, specific regulatory issues in US or Asia etc. are neglected.

Ethics in Finance

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(1) The Situation of the Banking System after the Crisis

Ethics in Finance Banking Regulation after the Crisis

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Ethics in Finance Banking Regulation after the Crisis

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Ethics in Finance Banking Regulation after the Crisis

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Ethics in Finance Banking Regulation after the Crisis

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Ethics in Finance Banking Regulation after the Crisis

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Ethics in Finance Banking Regulation after the Crisis

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Ethics in Finance Banking Regulation after the Crisis

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Ethics in Finance Banking Regulation after the Crisis

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Ethics in Finance Banking Regulation after the Crisis

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Ethics in Finance Banking Regulation after the Crisis

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Ethics in Finance Banking Regulation after the Crisis

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(2) Implemented and Planned Regulations according to Basel III

concentration on the following strategic magnitudes of banking business ( - ) capital

( - ) liquidity

( - ) leverage

Ethics in Finance Banking Regulation after the Crisis

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Ethics in Finance Banking Regulation after the Crisis

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Ethics in Finance Banking Regulation after the Crisis

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Ethics in Finance Banking Regulation after the Crisis

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Ethics in Finance Banking Regulation after the Crisis

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Ethics in Finance Banking Regulation after the Crisis

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(3) Neglected Problems

To sum up: - Basel III relies on quantitative measures to enhance the balance

sheets of banks with a strong concentration on the capital base.

- Structural (systemically relevant banks) and qualitative (nature of transactions) aspects of the present discussion are not included.

exception: In Germany uncovered short selling, in general, is forbidden.

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General problem for regulations:

Regulations in single countries or regions are not effective, becausebanks immediately transfer businesses to unregulated regions. Globalregulations are not achievable or are possible only after very long periodsof negotiations. Reluctance to introduce effective regulations on order to avoid losses in the financial business.

The following aspects are neglected in the Basel III concept but will beof significant importance for a future macro- and micro- prudentialregulation framework:

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(-) capital market oriented instruments ( contingent capital = liabilities which are converted into common capital in situations of shortages in required capital ratios)

(-) structure of regulatory bodies ( Central Banks only or Central Banks and an independent institution(Germany))

(-) reducing the „systemic“ importance of large banks - universal banking or separate banking systems - interbank indebtedness

(-) prohibition of special transactions (gambling)

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Proposal for limiting banking transactions along the following criterion:

Do transactions of banks contribute to economic welfare ?

in detail: Do transactions of banks create, encourage or facilitate real and monetary transactions improving the welfare of the society ?

problem: pure gambling: Capital gains of the winner are equal to the capital loss of the looser, the overall net value remains unchanged.

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Example: Bank A issues a DJ- certificate to the public with the following (extremely simplified )characteristics: - the papers earns an interest rate of 0% if the DJ does not change more than +/- 2% - if the DJ goes up more than +2% the interest rate follows exactly - if the DJ looses more than 2 % the paper looses correspondingly

Consequences: In all situations gains are matched by losses. In addition, both parties are confronted with additional risk. An overall increase in the net welfare of the society is not observable.

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(4) Summary and Conclusions

(-) The regulations of Basel III are a quantitave approach to make bank`s balance sheets more crisis proof. They will not be able to avoid future crises in a global system of banks using all financial instruments existing today.

(-) Qualitative and structural regulations are necessary reducing the systemic relevance of large banks and limiting or prohibiting specific financial transactions.