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Banking Regulation after the Crisis. Prof. Dr. Volbert Alexander Goethe University Frankfurt (Germany) Bank of Greece , Athens April 2011 . Banking Regulation after the Crisis. Ethics in Finance. Banking regulation after the crisis became a dominant problem in the

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banking regulation after the crisis

Banking Regulation after theCrisis

Prof. Dr. Volbert Alexander

Goethe University Frankfurt

(Germany)

Bank of Greece, Athens April 2011

ethics in finance

Banking Regulation after theCrisis

Ethics in Finance

Banking regulation after the crisis became a dominant problem in the

present discussions. Many proposals are launched with the central focus

on the question:

How can future crises be avoided by prudent macro- and

microeconomic regulations ?

Presentation is concentrated on the following issues:

(1) The Situation of the Banking Sector after the Crisis

(2) Implemented and Planned Regulations According to Basel III

(3) Neglected Problems

(4) Summary and Conclusions

The analysis is concentrated on the discussion in Europe,

specific regulatory issues in US or Asia etc. are neglected.

ethics in finance14

Banking Regulation after theCrisis

Ethics in Finance

(2) Implemented and Planned Regulations according to Basel III

concentration on the following strategic magnitudes of banking business

( - ) capital

( - ) liquidity

( - ) leverage

ethics in finance20

Banking Regulation after theCrisis

Ethics in Finance

(3) Neglected Problems

To sum up:

- Basel III relies on quantitative measures to enhance the balance sheets of banks with a strong concentration on the capital base.

- Structural (systemically relevant banks) and qualitative (nature of transactions) aspects of the present discussion are not included.

exception: In Germany uncovered short selling, in general,

is forbidden.

ethics in finance21

Banking Regulation after theCrisis

Ethics in Finance

General problem for regulations:

Regulations in single countries or regions are not effective, because

banks immediately transfer businesses to unregulated regions. Global

regulations are not achievable or are possible only after very long periods

of negotiations.

Reluctance to introduce effective regulations on order to

avoid losses in the financial business.

The following aspects are neglected in the Basel III concept but will be

of significant importance for a future macro- and micro- prudential

regulation framework:

ethics in finance22

Banking Regulation after theCrisis

Ethics in Finance

(-) capital market oriented instruments ( contingent capital = liabilities

which are converted into common capital in situations of shortages

in required capital ratios)

(-) structure of regulatory bodies ( Central Banks only or Central Banks

and an independent institution(Germany))

(-) reducing the „systemic“ importance of large banks

- universal banking or separate banking systems

- interbank indebtedness

(-) prohibition of special transactions (gambling)

ethics in finance23

Banking Regulation after theCrisis

Ethics in Finance

Proposal for limiting banking transactions along the following criterion:

Do transactions of banks contribute to economic welfare ?

in detail: Do transactions of banks create, encourage or facilitate real

and monetary transactions improving the welfare of the

society ?

problem: pure gambling: Capital gains of the winner are equal to the

capital loss of the looser, the overall net value

remains unchanged.

ethics in finance24

Banking Regulation after theCrisis

Ethics in Finance

Example: Bank A issues a DJ- certificate to the public with the following

(extremely simplified )characteristics:

- the papers earns an interest rate of 0% if the DJ does not

change more than +/- 2%

- if the DJ goes up more than +2% the interest rate follows

exactly

- if the DJ looses more than 2 % the paper looses correspondingly

Consequences: In all situations gains are matched by losses. In addition,

both parties are confronted with additional risk. An

overall increase in the net welfare of the society is not

observable.

ethics in finance25

Banking Regulation after theCrisis

Ethics in Finance

(4) Summary and Conclusions

(-) The regulations of Basel III are a quantitave approach

to make bank`s balance sheets more crisis proof. They

will not be able to avoid future crises in a global system

of banks using all financial instruments existing today.

(-) Qualitative and structural regulations are necessary

reducing the systemic relevance of large banks and

limiting or prohibiting specific financial transactions.