Stiglitz has argued that failures in financial markets have come about because of poorly designed incentive structures, inadequate competition and inadequate transparency. Part of this is because larger institutions have been resistant to changes that would actually create more healthy competition. Better regulation is required to rein in the financial markets and bring back trust in the system.
The agenda for regulatory reform is large.I do not think it will be completed overnight. We will not begin to restore confidence in our financial markets until and unless we begin serious reform.Specifically, the following areas should be considered.The introduction of a country bankruptcy code that will enable orderly sovereign debt restructuring. It is not just enough expanding the capital adequacy requiements, but also making it counter - cyclical, rather than pro - cyclical as it currently is(that is, making credit a bit harder to get during good times).
While I agree that pro-cyclical capital was a significant issue in the financial crisis, the Fed stress tests go quite some way to remove this bias. Banks need to run the stress tests under some quite stressed scenarios and the Fed can block their capital distribution plans if the banks fail the test. In effect, bank capital is being evaluated under a very different economic situation than the current environment. You should check out the work by the Bank of England's Andy Haldane, which is very good on bank capital issues and regulation. His point, and it is very valid, is that the current system is complex and that complexity obscures the true position of the banks. Risk based capital can be very misleading since Greek sovereign debt was zero-risk weighted (i.e. incurred no capital charge on the balance sheet even as the crisis loomed).
http://online.wsj.com/news/articles/SB10001424052702303456104579489643124383708?mod=djemalertMARKET As the news that has just come out reinforces my point about capital
https://www.researchgate.net/publication/286256177_Global_Financial_Crisis_Exploring_the_Special_Role_of_US_Banks_and_Regulations
Article Global Financial Crisis: Exploring the Special Role of U.S. ...
Hi,
You may be interested by this paper where information quality seems to be a very important device::
. Who Moves Markets in a Sudden Marketwide Crisis? Evidence from 9/11.
By: Burch, Timothy R.; Emery, Douglas R.; Fuerst, Michael E. Journal of Financial & Quantitative Analysis. Apr2016, Vol. 51 Issue 2, following p463-487. 42p.
Best regards
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