Does new international regulation help crisis prevention? Implications for

Middle Income Countries?

Stephany Griffith-Jones, sgj2108@columbia.eduShari Spiegel andMatthias Thiemann

Overall context

Aims of the financial system- Managing risk and avoiding crisis- Allocating capital to the real economy

efficiently- Financial system did neither

Some key problems

- One problem: OTD-model with its increased leverage and maturity mismatches which increase systemic risk

- Crisis revealed too low core capital, leverage too high and

- Both accounting and regulation was pro-cyclical

Basel 3

Size and qualitio of core capital improved (but is it enough?)

Simple leverage ratio 1:30 (problematic) Counter-cyclical regulation Liquidity coverage ratio positive

Implications for middle income countries

Several elements of Basel 3 positive, such as countercyclical buffers and liquidity ratios; increasing quantity and quality of core capital if needed

Too slow and gradual introduction of reforms desirable to accelerate in MIC‘s?

Dodd-Frank Act

More rigorous than initially expected, but weakened by lobbying, e.g. Volcker rule and derivatives, further diluted in implementation

Positive institutional developments: consumer protection agency (prevents abuse) and systemic risk regulator also in EU (prevents silo-thinking about systemic risk)

both relevant for MICs

Policy suggestions MIC‘s may wish to consider

Counter-cyclical regulations Prevent large currency and maturity mismatches Possible increase of quantity and quality of core

capital Putting all transactions on the balance sheet Forcing derivatives on exchanges Require foreign banks to have subsidiaries and not

branches