: Bank Regulations and Macroeconomic Fluctuations Year of Publishing
: 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 their risk profile, as well as plans for maintaining their capital levels. Supervisors should play their role to monitor the operations of bank, so as to ensure that banks are always compliant with the guidelines set. The third pillar is market discipline, which refers to the publicity of the financial and other information of banks. This grants chance for depositors and creditors to use the information given to appraise the level of risk and make investment decisions. Apart from Basel Accord, there are several other regulations for banks, such as reserve requirement, corporate governance, financial reporting and disclosure requirements, credit rating requirement, large exposure restrictions and activity and affiliation restrictions (Wikipedia, 2013). Reasons for the Research
How do the bank regulations influence the economy? This perhaps would be the major concern of Goodhart et al. There are numerous reasons why the researches would like to investigate this issue. First of all, the effect of bank regulations on the economy could be considerable. For instance, Misa Tanaka (2003) points out that since Basel II has become more risk-sensitive, banks would perhaps tend to lend to companies which have renowned reputation and sound financial background. Small and medium enterprises (SMEs) might have less chance to be granted the credit as they have little access to market-based finance and have higher capital requirements. Consequently, their investment and production might decline. Several countries in which their financial systems are based on the banks, such as Germany and Japan, might have dilemma as most companies in these countries are bank-dependent and need bank loans.
Secondly, the researchers would like to identify the efficacy of Basel II, which is still freshly introduced to financial institutions at the moment. Basel II has become more risk-sensitive and this leads banks to have less exposure on risks. Basel II can also help banks to perk up their...
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
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