By Rochet J.-C.
Between economists' reasons are ethical probability, ill-judged capital adequacy principles and the incompetence of supervisors. Jean-Charles Rochet, a number one authority on banking, argues the genuine challenge lies with politicians who too frequently insist on rescuing bancrupt banks for non permanent purposes in their personal. [W]hatever the decision at the coverage proposals, the e-book makes fascinating interpreting in present circumstances.(John Plender monetary instances )The ebook presents an outstanding advent to the speculation of banking legislation. . . . i will be able to suggest the publication to an individual drawn to a proper, educational method of banking legislation. The concise conclusions of the person articles offer invaluable principles for adjustments in banking regulation.(Bernd Brommundt monetary Markets and Portfolio administration )
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Extra info for Why Are there So Many Banking Crises?
Sample text
In a nutshell, my main conclusions will be: • Banking crises are largely amplified, if not provoked, by political interference. • Supervision systems face a fundamental commitment problem, analogous to the time consistency confronted by monetary policy. 1 1 After finishing this paper, I became aware of an article of Quintyn and Taylor (2002), also presented in the Venice Summer Institute of CESIfo (July 2002), that basically arrives to the same conclusions. ✐ ✐ ✐ ✐ ✐ ✐ “rochet” — 2007/9/19 — 16:10 — page 23 — #35 ✐ WHY ARE THERE SO MANY BANKING CRISES?
Out of a sample of 104 failing banks, Goodhart and Schoenmaker find that 73 resulted in rescue and only 31 in actual liquidation. 8 This is confirmed by other studies. , the lender of last resort facility, was often used improperly to rescue banks that subsequently failed. So market discipline can be useful in two respects: by directly penalizing the banks that take too much risk without the need for an intervention by supervisors; by indirectly providing new objective information, such as private ratings, interest rate spreads, or secondary prices of debt that can be used by supervisors.
The rest of the paper is organized as follows. 2 presents the model. 3 discusses runs and solvency. 4 characterizes the equilibrium of the game between investors. 5 studies the properties of this equilibrium and the effect of prudential regulation on coordination failure. 6 makes a first pass at the LLR policy 9 See also Goldstein and Pauzner (2003), Heinemann and Illing (2002), and Corsetti et al. (2004). ✐ ✐ ✐ ✐ ✐ ✐ “rochet” — 2007/9/19 — 16:10 — page 41 — #53 ✐ COORDINATION FAILURES AND THE LLR ✐ 41 implications of our model and its relation to Bagehot’s doctrine.