Transatlantic banking crisis: analysis, rating, policy issues

Abstract

The key dynamics of the transatlantic banking crisis are analyzed and the five key requirements for restoring stability and efficiency in the EU/OECD banking sector are highlighted. Most important is the introduction of a new tax regime designed to encourage bankers to take a more long-term time horizon in decision-making and to reduce excessive risk-taking. Banks and funds should be taxed not only on the basis of profits but also on the basis of the variability—read variance—of the rate of return on equity: the higher the variability over time, the higher the tax to be paid. The quality and comprehensiveness of banks’ balance sheets must be radically improved and hedge funds should be regulated. The tax formula proposed here is an important institutional innovation designed to encourage “sustainable banking”. Moreover, new approaches to macroeconomic modeling are emphasized—including integration of rating into a macro model. Finally, the hybrid macro model presented sheds new light on the effects of the banking crisis, as it allows for a better understanding of the interaction of fiscal policy, monetary policy and innovation variables.