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By Thorsten Beck

Banking is again within the headlines. From determined efforts via governments to deal with the Eurozone predicament to the "Occupy Wall road" move that's at the moment spreading around the globe, banks are back at centre level. This new VoxEU.org booklet provides a suite of essays via prime eu and US economists that offer suggestions to the monetary hindrance and recommendations for medium- to long term reforms to the regulatory framework during which monetary associations function. Key proposals comprise: -- eu secure Bonds (ESBies): serious of Eurobonds, the authors suggest another resolution within the kind of "European secure Bonds" (ESBies) -- securities funded through at the moment remarkable executive debt (up to 60\% of GDP) that might represent a wide pool of "safe" resources. The authors argue that ESBies could tackle either liquidity and solvency difficulties in the eu banking process and, such a lot significantly, support to differentiate among the 2. -- Capital and liquidity specifications -- possibility weights are the most important: whereas ringfencing will be a part of a smart regulatory reform, it's not enough. Capital necessities with hazard weights which are dynamic, counter-cyclical and take into consideration co-dependence of monetary associations are severe, and one measurement doesn't inevitably healthy all. equally, liquidity standards must be adjusted to lead 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 have an effect on banks' risk-taking behaviour and may truly bring up industry volatility; additionally, its profit power may be over priced. -- the necessity for a better European-wide regulatory framework: If the typical ecu marketplace in banking is to be stored -- and the authors argue that it's going to be -- then the geographic perimeter of banks needs to be matched with an identical geographic perimeter in rules, which finally calls for superior European-level associations.

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To put this into perspective, consider Federal Reserve Chairman Ben Bernanke’s oft-cited analogy for why bailouts, however distasteful, are sometimes necessary. Bernanke has described a hypothetical neighbour who smokes in bed and, through his 42 The Future of Banking carelessness, starts a fire and begins to burn down his house. You could teach him a lesson, Bernanke says, by refusing to call the fire department and letting the house burn to the ground. However, you would risk the fire spreading to other homes.

Edu/welcome/risk. Of some interest, these measures estimated in 2006 and early 2007 load quite closely on the firms that performed poorly during the financial crisis. Or, regulators could estimate a firm’s capital losses during adverse times via stress tests of financial institutions. Stress tests are conducted routinely by regulators and the estimated percentage losses from these tests could simply be substituted into the above formula for capital requirements. Of course, the regulator would need to impose scenarios that necessarily coincide 45 VOX Research-based policy analysis and commentary from leading economists with financial crises, in other words, much more severe than those employed in stress tests this year both in the US and Europe.

Von Hagen, Jürgen and Tai-Kuang Ho (2007) “Money Market Pressure and the Determinants of Banking Crises”, Journal of Money, Credit and Banking 39: 10371066. About the author Steven Ongena is a Professor in Empirical Banking at CentER - Tilburg University in the Netherlands and a CEPR Research Fellow in financial economics. His research interests include firm-bank relationships, bank mergers and acquisitions, and financial systems. José-Luis Peydró is an Associate Professor (with Tenure) at Universitat Pompeu Fabra, an Affiliate Professor at Barcelona GSE, and an Economist in the European Central Bank.

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