Additional prudential regulations for banks, especially with regard to capital requirements, – burden banks with higher costs, – reduce their profits, – diminish their ability to lend and – can, in the worst case, lead to a credit crunch. – On the other hand, however, financial stability brought about by stricter regulation is generally regarded as the higher goal. After all, avoiding crises safeguards and increases the prosperity of all and is thus also in the long-term interest of the institutions. – Undeniably, tighter regulation makes banks more resilient to crises. But this is reflected in a reduction in their funding costs. At least part of the costs arising from higher supervisory requirements can be offset in this way. – On the other hand, the tighter the regulatory density, the stronger the incentives for regulatory arbitrage. Any additional regulation of banks simultaneously creates incentives to shift business to the less regulated shadow banking sector. Because transparency in this sector is still limited, risks can build up there unnoticed, posing a threat to financial stability as a whole. – Basically, however, the right approach is to take appropriate measures to leave responsibility for transactions of all kinds as far as possible with the banks or to shift it back to them. It has been proven that this is the best way to avoid financial crises. – See investment liability, supervisory avoidance, committee mania, Banana Skins Survey, Basel-III, harmonization, moral hazard, overkill, regulatory, regulation, regulatory mania, shadow banking, straitjacking, systemic conflict, financial market, overregulation, preemption. – Cf. Financial Stability Report 2012, pp. 67 et seq. (dangers from the less regulated areas of the financial market).
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University Professor Dr. Gerhard Merk, Dipl.rer.pol., Dipl.rer.oec.
Professor Dr. Eckehard Krah, Dipl.rer.pol.
E-mail address: info@ekrah.com
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