by Charles A. E. Goodharta, Anil K Kashyapb, Dimitrios P. Tsomocosc and Alexandros P. Vardoulakisd
In this companion paper to Goodhart et al. (2012), we explore the interactions of various types of financial regulation. We find that regulations that control fire-sale risk are critical for delivering financial stability and improving the welfare of savers and borrowers. We describe the combinations of capital regulations, margin requirements, liquidity regulation, and dynamic provisioning that are most effective in this respect. A policy featuring margin requirements together with countercyclical capital requirements delivers equal or better outcomes for the economy than does an unregulated financial system. But it is easy to produce combinations of regulation that look sensible but, when combined, have adverse effects on the economy.
JEL Codes: G38, L51.
Full article (PDF, 35 pages 286 kb)
Discussion by Paul M.W. Tucker
Discussion by Tobias Adrian
a Financial Markets Group, London School of Economics
b University of Chicago Booth School of Business, Federal Reserve Bank of Chicago, and National Bureau of Economic Research
c Said Business School and St. Edmund Hall, University of Oxford
d European Central Bank and Banque de France