Macroprudential Risk Research Articles

The limits of EU hedge fund regulation

This article examines the mechanics of the recently adopted EU Alternative Investment Fund Managers Directive. On balance, the results of this examination are not encouraging. The EU has failed to mount a persuasive case for why the Directive represents an improvement over existing national regulatory regimes or prevailing market practices in several key areas. Furthermore, by attempting to shoehorn an economically, strategically and operationally diverse population of financial institutions into a single, artificial class of regulated actors, the EU has established what is in many respects a conceptually muddled regulatory regime. Most importantly, however, the Directive's approach toward the amelioration of the potential systemic risks associated with alternative investment funds manifests an inherent and ultimately fatal structural flaw. This flaw punctuates the necessity of a globally co-ordinated response toward macro-prudential risks arising within a globally integrated financial system.

What Powers for the Federal Reserve?

In this essay, I explain my reasons for the following policy recommendations: (1) The Fed should continue to manage monetary policy as it has in the past, should act as the nation's lender of last resort, should fully supervise the large bank holding companies and their subsidiary banks, and should be given resolution authority over the institutions that it supervises. (2) While a council of supervisors and regulators can play a useful role in dealing with macro prudential risks, it should not replace the central role of the Federal Reserve. (3) The virtually unlimited lending powers that the Fed has recently exercised in creating credit and helping individual institutions should be restricted in duration and subjected to formal Treasury approval backed by Congressional preauthorization of funds. (4) The Fed's capital rules for commercial banks need to be strengthened by replacing the existing risk-based capital approach with a broader definition of risk and the introduction of contingent capital. (5) Subjecting mortgage lending to a broader range of Federal Reserve regulations and allowing the Fed to deal with nonbank creators of mortgage products would be better than the creation of a new consumer financial protection organization. (JEL E52, E58, G21, G28)

Financial regulation and oversight: Lessons from the crisis for Latin America and the Caribbean

The analysis of the financial crisis that broke out in the United States in mid-2008 gave rise to a vigorous debate about the role of financial regulation and oversight. The present article briefly analyses the crisis with a particular emphasis on these subjects, with the goal of suggesting some lessons that can be drawn from it for Latin America and the Caribbean. Accordingly, it describes the economic conditions and major changes that occurred in the financial system of the United States during the 1990s and the current decade, identifying the contribution of these factors to the crisis. The initial lessons drawn from this analysis are the need to: (i) consider macroprudential risk in the regulatory framework, (ii) reduce the procyclical bias of the system, (iii) widen the scope of regulation and (iv) deal with the conflicts of interest that prevent prompt and reliable disclosure of the risk taken on by financial institutions.

Long Term Reform and the Banking Crisis

Once we emerge from the current world recession, we will need to address the flaws in the present regulatory framework that permitted the banking crisis to assume the enormous proportions that it has. The question is how far we need to go in tightening regulation in order to correct for the insufficient safeguards against macroprudential risks that exist today. On this issue, we face an important dilemma. To regulate finance too much is to assure a permanent sub-optimal allocation of risks. It means to proceed to a situation where a large fraction of the population will need to forego a steady flow of utilities in their lifetime because of avoidable and socially inefficient credit rationing and excessive interest rates. On the other hand, to fall short of adequate regulation means to face a recurrence of the sort of collapse of finance and deep recession to which we are subject today. But while there is a fundamental choice to be made, so far as I can see, current professional discussion can be summoned on either side. This point will be the focus of my remarks. Let me begin with the case for light regulation. A basic reason for a light regulatory response to the present difficulties is that some of the financial innovations of recent decades have important merits. This is true, in particular, of the securitization of real estate loans. Many regional lenders have inadequate opportunities to diversify the property risks in their region. Residents of other Open Econ Rev (2010) 21:159–161 DOI 10.1007/s11079-009-9146-4