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Empowering supervisors with more principles and discretion to implement them will not reduce the dangers of the prudential approach to financial regulation

Author

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  • Mario Tonveronachi

    (University of Siena)

Abstract
The paper addresses two main points: the deficiencies of the past regulatory design and the additional dangers coming from financial reforms that increase the regulatory powers of supervisors. The first point is briefly dealt with reference to past experience and alternative theoretical approaches. For the second point I argue that a prudential regulatory design necessarily leaves large discretionary powers to supervisors, who use them to shape the effective direction impressed to regulation. The current crisis has shown that the force of its first impact much depended on how supervisors had formerly utilised their discretion. Recent reforms and proposals are not changing the basic design of prudential regulation, while give additional regulatory powers to supervisors. If, as a consequence, we will experience in the short-run some regulatory uncertainty, lobbying pressures and international regulatory arbitrage will most probably guide the final result towards few additional regulatory costs and an unchanged systemic fragility. As an alternative we could go back to the methodology, not the specific design, of the Glass-Steagall Act, shaping the financial system by means of structural rules aided by few simple prudential ones.

Suggested Citation

  • Mario Tonveronachi, 2010. "Empowering supervisors with more principles and discretion to implement them will not reduce the dangers of the prudential approach to financial regulation," PSL Quarterly Review, Economia civile, vol. 63(255), pages 363-378.
    • Handle: RePEc:psl:pslqrr:2010:43
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    File URL: http://ojs.uniroma1.it/index.php/PSLQuarterlyReview/article/view/9424/9319
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    References listed on IDEAS

    as
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    3. Barth, James R. & Caprio, Gerard Jr. & Levine, Ross, 2004. "Bank regulation and supervision: what works best?," Journal of Financial Intermediation, Elsevier, vol. 13(2), pages 205-248, April.
    4. Mario Tonveronachi, 2010. "Financial innovation and system design," PSL Quarterly Review, Economia civile, vol. 63(253), pages 131-144.
    5. Masciandaro, Donato & Quintyn, Marc & Taylor, Michael W., 2008. "Inside and outside the central bank: Independence and accountability in financial supervision: Trends and determinants," European Journal of Political Economy, Elsevier, vol. 24(4), pages 833-848, December.
    6. Jan Kregel, 2008. "Financial Flows and International Imbalances--The Role of Catching-up by Late Industrializing Developing Countries," Economics Working Paper Archive wp_528, Levy Economics Institute.
    Full references (including those not matched with items on IDEAS)

    Citations

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    Cited by:

    1. Alessandro Roncaglia, 2011. "Introduction," PSL Quarterly Review, Economia civile, vol. 64(258), pages 189-191.
    2. Mario Tonveronachi, 2015. "G20/BCBS/FSB Proposal and their Integration into European Framework," Working papers wpaper96, Financialisation, Economy, Society & Sustainable Development (FESSUD) Project.
    3. Egert Juuse & Rainer Kattel, 2014. "Financial Regulation in Estonia," Working papers wpaper57, Financialisation, Economy, Society & Sustainable Development (FESSUD) Project.
    4. Alessandro Roncaglia, 2013. "Introduction," PSL Quarterly Review, Economia civile, vol. 66(267), pages 369-370.
    5. Elisabetta Montanaro, 2023. "La vigilanza bancaria. Storia, teorie, prospettive di Lorenzo Esposito e Giuseppe Mastromatteo: un articolo di recensione (La vigilanza bancaria. Storia, teorie, prospettive by Lorenzo Esposito and Gi," Moneta e Credito, Economia civile, vol. 76(302), pages 133-153.
    6. Mario Tonveronachi, 2013. "De-globalising bank regulation," PSL Quarterly Review, Economia civile, vol. 66(267), pages 371-385.
    7. Elisabetta Gualandri & Enzo Mangone & Aldo Stanziale, 2011. "Internal Corporate Governance and the Financial Crisis: Lessons for Banks,Regulators and Supervisors," Centro Studi di Banca e Finanza (CEFIN) (Center for Studies in Banking and Finance) 11111, Universita di Modena e Reggio Emilia, Dipartimento di Economia "Marco Biagi".
    8. Alessandro Roncaglia, 2011. "Macroeconomics in crisis and macroeconomics in recovery," PSL Quarterly Review, Economia civile, vol. 64(257), pages 167-185.
    9. Alessandro Roncaglia, 2011. "Macroeconomie in crisi e macroeconomie in ripresa," Moneta e Credito, Economia civile, vol. 64(254), pages 115-133.
    10. Carlo D'Ippoliti, 2011. "Introduction: the crisis of economies and economics," PSL Quarterly Review, Economia civile, vol. 64(257), pages 95-103.
    11. Emiliano Brancaccio, Orsola Costantini, Stefano Lucarelli, 2015. "Crisi e centralizzazione del capitale finanziario (Crysis and Centralization of Financial Capital)," Moneta e Credito, Economia civile, vol. 68(269), pages 53-79.
    12. Elisabetta Gualandri & Enzo Mangone & Aldo Stanziale, 2011. "Internal Corporate Governance and the Financial Crisis: Lessons for Banks,Regulators and Supervisors," Centro Studi di Banca e Finanza (CEFIN) (Center for Studies in Banking and Finance) 0029, Universita di Modena e Reggio Emilia, Dipartimento di Economia "Marco Biagi".
    13. Jan Kregel, 2010. "Can a return to Glass-Steagall provide financial stability in the US financial system?," PSL Quarterly Review, Economia civile, vol. 63(252), pages 39-76.
    14. Alessandro Roncaglia, 2010. "Confronting the financial crisis: surveillance and regulation," PSL Quarterly Review, Economia civile, vol. 63(255), pages 295-298.

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    More about this item

    Keywords

    financial regulatory framework; financial supervision; systemic risk;
    All these keywords.

    JEL classification:

    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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