Article Review: Bank Regulations and Macroeconomic Fluctuations Bycharles Goodhart, Boris Hofmann and Miguel Segoviano (2004)
Journal Title : Bank Regulations and Macroeconomic Fluctuations
Year of Publishing : 2004
Author s : Charles Goodhart, Boris Hofmann and Miguel Segoviano
Background of Research
In the section II (i), Eichengreen and Bordo (2003), cited by Goodhart et al. (2004), has separated periods between 1880 and 1997 into four major groups: 1880-1913, 1919-1939, 1945-1971 and 1973-1997. During the period of 1945-1971, demands were high, and this has incurred an acceleration of the inflationary pressure. Nevertheless, there were no banking crises since the banking system was being kept under tight credit controls. Therefore, the bank regulation was light. This also helped to maintain the unemployment rate below the natural rate. In the decade of the 1970s, stagflation occurred, and contractionary monetary policy was required to lower the level of inflation. This shows evidence how the banks can really affect the economy of a nation, or even the world, through their parameter. In 1988, the Basel Committee on Banking Supervision (BCBS, initially called the Blunden and then the Cooke Committee), has introduced the Accord on Capital Adequacy Requirements, which is known as Basel I nowadays. In 2004, the committee has introduced another Accord, which is known as Basel II. Basel II is a revised edition of regulatory framework and it is being used currently. Basel II adopts a “three pillars” concept, which consists of three major aspects: (i) Minimum capital requirement, (ii) Supervisory review, and (iii) Market discipline. In the viewpoint of regulator, banks should hold a certain amount of capital in order to operate. As required by Basel II, a minimum of 8% of total capital ratio should be possessed by the banks. There are three types of risk that should be valued under the minimum capital requirement: credit risk, operational risk and market risk. The second pillar is supervisory review, which requires banks to evaluate their capital adequacy in general with regard to
Year of Publishing : 2004
Author s : Charles Goodhart, Boris Hofmann and Miguel Segoviano
Background of Research
In the section II (i), Eichengreen and Bordo (2003), cited by Goodhart et al. (2004), has separated periods between 1880 and 1997 into four major groups: 1880-1913, 1919-1939, 1945-1971 and 1973-1997. During the period of 1945-1971, demands were high, and this has incurred an acceleration of the inflationary pressure. Nevertheless, there were no banking crises since the banking system was being kept under tight credit controls. Therefore, the bank regulation was light. This also helped to maintain the unemployment rate below the natural rate. In the decade of the 1970s, stagflation occurred, and contractionary monetary policy was required to lower the level of inflation. This shows evidence how the banks can really affect the economy of a nation, or even the world, through their parameter. In 1988, the Basel Committee on Banking Supervision (BCBS, initially called the Blunden and then the Cooke Committee), has introduced the Accord on Capital Adequacy Requirements, which is known as Basel I nowadays. In 2004, the committee has introduced another Accord, which is known as Basel II. Basel II is a revised edition of regulatory framework and it is being used currently. Basel II adopts a “three pillars” concept, which consists of three major aspects: (i) Minimum capital requirement, (ii) Supervisory review, and (iii) Market discipline. In the viewpoint of regulator, banks should hold a certain amount of capital in order to operate. As required by Basel II, a minimum of 8% of total capital ratio should be possessed by the banks. There are three types of risk that should be valued under the minimum capital requirement: credit risk, operational risk and market risk. The second pillar is supervisory review, which requires banks to evaluate their capital adequacy in general with regard to
References: Eichengreen, B., & Bordo, M. (2003). Crises Now and Then: What Lessons from the Last Era of Financial Globalisation. Monetary History, Exchange Rates and Financial Markets; Essays in Honour of Charles Goodhart, 2, 52-91. Goodhart, C., Hofmann, B., & Segoviano, M. (2004). Bank Regulation and Macroeconomic Fluctuations. Oxford Review of Economic Policy, 20(4), 591-615. doi:10.1093/oxrep/grh034 Misa, T. (2003). The Macroeconomic Implications of the New Basel Accord. CESifo Economic Studies, 49, 217-232. Retrieved from http://www.cesifoeconomicstudies.de/ Spong, K. (2000). Banking Regulation: Its Purposes, Implementations, and Effects. (5th). Kansas City, Missouri, United States of America. Wikipedia. (2013). Basel Accord II. Retrieved March 8, 2013, from http://en.wikipedia.org/wiki/Basel_II