Post-Crisis Regulatory Reform in Banking: Address Insolvency Risk, Not Illiquidity!

19 Pages Posted: 5 Feb 2018

See all articles by Anjan V. Thakor

Anjan V. Thakor

Washington University in St. Louis - John M. Olin Business School; Financial Theory Group; European Corporate Governance Institute (ECGI); Massachusetts Institute of Technology (MIT) - Laboratory for Financial Engineering

Date Written: January 20, 2018

Abstract

An extensive review of the evidence related to the 2007-09 crisis reveals that it was an insolvency risk crisis, not a liquidity crisis. The appropriate post-crisis regulatory reform should therefore focus on increasing capital requirements. The Basel III liquidity requirements do not serve a useful economic purpose in dealing with the root causes of the stresses that led to the 2007-09 crisis, and unnecessarily constrain the asset transformation and liquidity creation roles of banks to the detriment of economic growth.

Keywords: liquidity risk, insolvency risk, post-crisis regulatory reform

JEL Classification: G21, G28

Suggested Citation

Thakor, Anjan V., Post-Crisis Regulatory Reform in Banking: Address Insolvency Risk, Not Illiquidity! (January 20, 2018). Available at SSRN: https://ssrn.com/abstract=3106055 or http://dx.doi.org/10.2139/ssrn.3106055

Anjan V. Thakor (Contact Author)

Washington University in St. Louis - John M. Olin Business School ( email )

One Brookings Drive
Campus Box 1133
St. Louis, MO 63130-4899
United States

Financial Theory Group ( email )

United States

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

Massachusetts Institute of Technology (MIT) - Laboratory for Financial Engineering ( email )

100 Main Street, E62-618
Cambridge, MA 02142
United States

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