banking regulations after the global financial crisis, good.pdf

Banking Regulations after the Global Financial Crisis, Good Intentions and Unintended Evil _______________ Jean DERMINE 2013/02/FIN Banking Regulations after the Global Financial Crisis, Good Intentions and Unintended Evil Jean Dermine* 7 January 2013 Tentative. Not to be quoted. Comments welcome * The author is grateful to Denis Gromb and Rachael Noyes for insightful comments. * Professor of Banking and Finance at INSEAD Boulevard de Constance 77305 Fontainebleau, France. E-mail: jean. dermine@ A Working Paper is the author’s intellectual property. It is intended as a means to promote research to interested readers. Its content should not be copied or hosted on any server without written permission from publications.fb@ Find more INSEAD papers at /facultyresearch/research/search_papers.cfm Abstract More stringent regulations on bank capital, liquidity and corporate structure have been passed to increase the resilience of the global banking system. In this essay, we analyze the impact of these regulations and call attention to the fact that the banks’ responses might create unintended evil: a reduced supply of bank loans, adverse incentives on bank risk monitoring, and incentives to securitize assets and move financial intermediation to shadow banking. The conclusion is that privately-based mechanisms that put most creditors at risk are the best way to increase the safety and soundness of banking markets. It is argued that interbank debt should be put at risk because banks have a comparative advantage in risk monitoring. As putting short-term interbank at risk increases the danger of sudden deposit withdrawals, a mechanism is needed to extend