At present, banking regulation is being examined on two fronts. The first is an academic investigation which has come up with the potential for a globally imposed ‘risk tax’. The second is to supplement regulation by improving the culture and behaviour of banks. Both raise important questions on how to address long-standing issues with how to properly regulate the banking industry, especially when considering the systemic risk it poses to the world’s economy.
A new paper from a group of French academics calls into question, through a survey of 220 other papers on systemic risk, the effectiveness of the regulations that have been imposed on the banking sector by Basel III. These include liquidity requirements, higher capital ratios and a stricter definition of capital. These regulations may work to police individual banks, says the paper, but do nothing to identify risk in the system. In addition, the paper also questions Basel III’s approach to determining which banks are systemically important financial institutions (SIFIs). The authors, Sylvain Benoit of the Université Paris Dauphine, Jean-Edouard Colliard, and Christophe Perignon of HEC Paris, and Christophe Hurlin of the University of Orleans, propose a number of alternatives to the current regulatory tools. But in order to identify which ones will work, they suggest a closer working relationship between academics and regulators. One of the authors, Christophe Pérignon, said in an interview on the HEC website: “On the one hand, regulators have access to a wealth of confidential data, but we show their tools are relatively simple. On the other hand, academics have developed much more sophisticated tools and measures using the limited market and public data they have available. It’s time to bring these two sets together through research collaboration.”
