The influence of the economic approaches to regulation on banking regulations: a short history of banking regulations

Sophie Harnay and Laurence Scialom

Cambridge Journal of Economics, 2016, vol. 40, issue 2, 401-426

Abstract: This article highlights the theoretical foundations of the regulations at work in the banking sector and examines their responsibility in the onset of the 2007–2008 financial crisis. Drawing a parallel between the main changes in banking regulations since the 1960s and the evolutions in the economic analyses of regulation over the same period, it shows that the shift from the public interest theory of regulation that prevailed until the late 1960s towards the private interest theory of regulation accounts for the substitution of micro-prudential regulations for macro-prudential ones and explains a paradigmatic change in the conception of the regulatory instruments of the banking authorities. It also shows that although the outcome of several factors, the 2007–2008 crisis was also a consequence of the fact that the economic analysis of banking regulations supported micro-prudential regulations that fail to take the global features and impact of banking activities into account and have proved unable to recommend effective solutions in a context of crisis.

Date: 2016
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