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Global Lessons from the Financial Crisis


Princeton University Press Princeton and Oxford

Copyright © 2010 by Princeton University Press Published by Princeton University Press, 41 William Street, Princeton, New Jersey 08540 In the United Kingdom: Princeton University Press, 6 Oxford Street, Woodstock, Oxfordshire OX20 1TW All Rights Reserved Library of Congress Cataloging-in-Publication Data Dewatripont, M. (Mathias) Balancing the banks : global lessons from the financial crisis / Mathias Dewatripont, Jean-Charles Rochet, and Jean Tirole ; translated by Keith Tribe. p. cm. Includes bibliographical references and index. ISBN 978-0-691-14523-5 (hbk. : alk. paper) 1. Banks and banking— Government policy. 2. Banks and banking—State supervision. 3. Global Financial Crisis, 2008–2009. 4. Financial crises—History—21st century. I. Rochet, Jean-Charles. II. Tirole, Jean. III. Tribe, Keith. IV. Title. HG1573.D49 2010 332.1—dc22 2009052389 British Library Cataloging-in-Publication Data is available This book has been composed in Sabon Printed on acid-free paper. ∞ Printed in the United States of America 10 9 8 7 6 5 4 3 2 1


Acknowledgments chapter 1 Introduction—Mathias Dewatripont, Jean-Charles Rochet, and Jean Tirole Regulation in a Historical Perspective To Regulate or Not to Regulate? The Challenges Facing Prudential Regulation Building an Adaptive Regulatory System in a Global World Keeping a Balance


1 3 6 7 8

chapter 2 Lessons from the Crisis—Jean Tirole
Part I: What Happened? Part II: How Should the Financial System Be Reformed?

11 47

chapter 3 The Future of Banking Regulation— Jean-Charles Rochet The Basel Accords The Breakdown of the Basel Prudential Regime The Necessary Reforms

78 86 100

chapter 4 The Treatment of Distressed Banks— Mathias Dewatripont and Jean-Charles Rochet Reforming Prudential Policy for Distressed Banks Macroeconomic and Systemic Considerations International Cooperation

110 118 122

References Index

131 137

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Jean Tirole thanks Nicolas Chanut, Frédéric Cherbonnier, Jacques Delpla, Mathias Dewatripont, Pierre-Olivier Gourinchas, Marc Ivaldi, Jean-Pierre Landau, Sylvie Matherat, Michel Pébereau, Jean-Charles Rochet, Philippe Trainar, and participants at various conferences and seminars for very useful discussions and comments. The author is also very grateful to Keith Tribe for translating chapter 2 from French, and to Richard Baggaley for very helpful suggestions. Jean-Charles Rochet thanks Charles Calomiris, Patrick Honohan, Rafael Repullo, and all those who attended several seminars at the Banque de France, the Bank of Canada, and the Central Bank of Brazil, especially Sylvie Matherat and Eduardo Lundberg. He has also profited from detailed comments made by Jean Tirole on a draft version of his chapter. Responsibility for the arguments advanced here lie solely with the author, of course. Mathias Dewatripont and Jean-Charles Rochet thank Janet Mitchell and Peter Praet. Chapter 2 by Jean Tirole was first published as “Leçons d’une crise,” Toulouse School of Economics Notes no. 1 12/2008 (online at .tirole%28pdf%29.pdf). Chapter 3 by Jean-Charles Rochet was first published as “Le futur de la réglementation bancaire,” Toulouse School of Economics Notes no. 2 12/2008 (online at TSE/TSENotes/notes%282%29rochet%28pdf%29.pdf). Chapter 4 by Mathias Dewatripont and Jean-Charles Rochet, “The Treatment of Distressed Banks,” first appeared as a chapter of an electronic book by CEPR and Vox, entitled Financial Regulation and Macroeconomic Stability: Key Issues for the G20 (edited by Mathias Dewatripont, Xavier Freixas, and Richard...
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