Future of Banking by Thorsten Beck

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By Thorsten Beck

Banking is again within the headlines. From determined efforts by means of governments to handle the Eurozone obstacle to the "Occupy Wall road" move that's at the moment spreading around the globe, banks are back at centre degree. This new VoxEU.org e-book offers a suite of essays by way of prime eu and US economists that offer suggestions to the monetary obstacle and recommendations for medium- to long term reforms to the regulatory framework during which monetary associations function. Key proposals comprise: -- ecu secure Bonds (ESBies): severe of Eurobonds, the authors suggest an alternate resolution within the kind of "European secure Bonds" (ESBies) -- securities funded by way of presently awesome executive debt (up to 60\% of GDP) that may represent a wide pool of "safe" resources. The authors argue that ESBies may deal with either liquidity and solvency difficulties in the eu banking process and, so much seriously, aid to tell apart among the 2. -- Capital and liquidity specifications -- danger weights are the most important: whereas ringfencing should be a part of a smart regulatory reform, it's not enough. Capital specifications with probability weights which are dynamic, counter-cyclical and take into consideration co-dependence of monetary associations are serious, and one measurement doesn't unavoidably healthy all. equally, liquidity requisites must be adjusted to cause them to much less inflexible and pro-cyclical. whereas banks are at the moment under-taxed, the presently mentioned monetary transaction tax wouldn't considerably impact banks' risk-taking behaviour and can truly bring up marketplace volatility; moreover, its profit power may be overvalued. -- the necessity for a better European-wide regulatory framework: If the typical ecu marketplace in banking is to be kept -- and the authors argue that it may be -- then the geographic perimeter of banks needs to be matched with an analogous geographic perimeter in rules, which eventually calls for superior European-level associations.

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That is, these risks appeared in 36 The Future of Banking their traditional banking mortgage books themselves. Ring-fencing, by itself, would not necessarily have reduced these exposures. In this regard, it is useful to consider the capital requirements announced in the Vickers report. Banks will be required to hold equity capital of at least 10% of risk weighted assets in the ring fenced business, and both parts of the bank will be required to have total loss absorbing capital of at least 17% to 20%.

Stijn Van Nieuwerburgh is Associate Professor of Finance and the Yamaichi Faculty Fellow at New York University Leonard N. Stern School of Business, and a CEPR Research Fellow. His research lies in the intersection of macroeconomics, asset pricing, and housing. One strand of his work studies how financial market liberalization in the mortgage market relaxed households’ down payment constraints, and how that affected the macro-economy, and the prices of stocks and bonds. Dimitri Vayanos is Professor of Finance at the London School of Economics, where he also directs the Paul Woolley Centre for the Study of Capital Market Dysfunctionality, and a CEPR Research Fellow.

But what if the governance structure of banks is intrinsically linked to bank risk? And what if bank governance interacts with regulation to shape bank stability? This emphasis on using official regulations to induce sound banking while ignoring the role of bank governance is surprising because standard agency theories suggest that ownership structure influences corporate risk-taking (Jensen and Meckling 1976). This gap is also potentially serious from a policy perspective. The same regulations could have different effects on bank risk-taking depending on the comparative power of shareholders within the ownership structure of each bank.

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