Events

Finance Seminar

Author:

• Karim Pakravan
  DePaul University

The financial crisis of 2008 has resulted in mountains of research, new regulatory structures and a flurry of regulatory proposals, but no academic or policy consensus on an optimal regulatory framework. Nevertheless, there are a few things we can agree upon: (1), financial systems play a major and essential role in the economy, also can but the massive costs in the event of a financial crisis; (2), large and highly concentrated, complex and highly interconnected financial systems are a major cause of systemic risk; and (3), the Basel-Based regulatory and capital adequacy systems in place prior to 2008 have failed spectacularly and at many levels, mainly because of their complexity, which allowed the gaming of the system by financial firms, as well as regulatory capture by the so-called "Systemically Important Financial institutions" (SIFIs). In fact, the Basel framework has been a major source of systemic risk and financial crises. Yet, the regulatory establishment's response to the crisis has been to introduce even more complex rules: Dodd-Frank and Basel-III. Since complex regulatory systems potentially destabilizing, the financial regulatory architecture should focus on simplicity. One place to start would be to dismantle the the Basel capital rules with a Tangible Common Equity leverage ratio.