The foundations of banks’ risk regulation: A review of the literature

Georges Dionne ()

No 03-8, Working Papers from HEC Montreal, Canada Research Chair in Risk Management

Abstract: The stability of the banking industry around the world has been observed as periodical since the Great Depression. Financial markets have changed dramatically over the last twenty-five years, introducing more competition for and from banks. Banks are the financial institutions responsible for providing liquidity to the economy. This responsibility is, however, the main cause of their fragility. In 1988, the G10 modified banking regulation significantly by setting capital standards for banks. These standards have now been adopted by more than one hundred countries as part of their national regulation of banks’ risk. Consequently, it might be appropriate to continue developing national regulation based on optimal deposit insurance and to keep searching for other optimal complementary instruments against systemic risk. The central bank should be responsible for aggregate liquidity. Confidence in the financial sector is a public good that must be ensured by the government. Who should be in charge: the central bank or a regulatory agency? The revised literature seems to say that this role should be taken by a regulatory agency independent from the central bank and independent from the political power.

Keywords: Bank; liquidity; deposit insurance; capital standard; national regulation; credit risk; capital regulation; subordinated debt; governance; capital requirement; central bank; regulatory agency (search for similar items in EconPapers)
JEL-codes: D80 E44 G21 G22 L51 (search for similar items in EconPapers)
Pages: 42 pages
Date: 2004-01-03
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Related works:
Working Paper: The Foundationsof Banks' Risk Regulation: A Review of Literature (2003)
Working Paper: The Foundations of Banks' Risk Regulation: a Review of the Literature (2003)
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