Post-Crisis Regulation + Structural Reform Phil Molyneux
Post-Crisis Financial Reform 1. Prudential Regulation 2. Integrating Micro- and Macro-policies 3. Bank Supervision 4. Systemic Risk 5. Bank Resolution 6. Financial Market Structure 7. Structural Reform Liikanen, Vickers + Dodd Frank
Bank Structural Reform: Liikanen, Bank Recovery + Resolution Directive, Vickers, Dodd-Frank How to deal with extra-territorial issues? 3 silo banks? Vickers v Liikanen v Dodd Frank Legislation at different stages & development US rules stem from long-standing legal regime + provisions in Dodd-Frank - unlikely to be amended UK White Paper stemming from Vickers lacks details leaves room for substantial arbitrage Liikanen Report is simply advice from a high-level expert group to an EU Commissioner substantial arbitrage
Liikanen, Bank Recovery & Resolution Directive, Vickers + Dodd Frank
Source: Linklaters (2012) Comparison of Proposed Structural Reforms to the Banking Sector in the EU, UK and US
Bank Structural Reform: Liikanen, Bank Recovery + Resolution Directive, Vickers, Dodd-Frank How to deal with extra-territorial issues? 3 silo banks? Vickers v Liikanen v Dodd Frank LOW RISK + DIVERSIFICATION Early studies (Litan 1985, Wall 1987, Kwast 1989, Gallo et al. 1996, Uzun and Webb 2007, Jiangli and Pritsker 2008) tend to find that expansion into non-banking activities such as securities underwriting, securities brokerage, and asset securitization helps banks diversify away risk, at least partially. Legislation at different stages & development US rules stem from longstanding legal regime + provisions in Dodd-Frank - unlikely to be amended HIGH RISK + DIVERSIFICATIN Recent studies tend to find increased risk. Allen and Jagtiani (2000), DeYoung and Roland (2001), Stiroh (2004, 2006), DeJonghe (2010) and Demirguc-Kunt and Huizinga (2010) Liikanen Report is simply advice from a high-level expert group to an EU Commissioner substantial arbitrage UK White Paper stemming from Vickers lacks details leaves room for substantial arbitrage Probability of distressed bank failure declined with pure fee-based non-traditional activities such as securities brokerage and insurance sales, but increased with assetbased non-traditional activities such as venture capital, investment banking and asset securitization. (DeYoung and Torna, 2012)
Conclusions Interesting issues, nice agenda, little reform YET Most progress has been unilateral (US, UK) Searching for international cooperation maybe wrong + tricky: Untimely Reform is the lowest common denominator/ 3-silos maybe problematic What did cooperation ever do for me? (Basel I? Basel II? Basel III by 2018-9? The EU??) Best just to take a unilateral decision on the conditions for doing banking business
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