Financial Regulation Initiative

Financial Regulation Initiative

A new CEPR Network


After years of post-Crisis discussion and debate, a new financial regulation structure has been put in place. The regulatory landscape, however, is still evolving as implementation issues are being worked out. This evolution is revealing overlaps, gaps and unintended consequences – both across regulatory silos (banking, insurance, market clearing, etc.) and across nations. There is thus an explicit need for research and debate on these interactions especially in the European context.

CEPR’s new Financial Regulation Initiative will promote such research in an environment that keeps a broad range of stakeholders engaged in the ongoing debate. Specifically, the Initiative will:

  • Take a holistic and international approach that cuts across regulatory silos;
  • Be forward-looking, addressing the fundamental issues of what banking, insurance, and financial market regulation should look like for the coming decades, and how financial regulation can be made more precise and efficient without overregulation; and
  • Involve market participant, policymakers and academics in the discussion and analysis.

All the activity will be oriented to raising the level of the public debate on the rapidly evolving regulatory landscape.

The Initiative will focus on underlying issues rather than take a sectoral view. Where thus far regulation has considered individual rationality, the initiative will consider the regulation of collective risk-taking. It will first take stock of progress made in the seven years since the start of the crisis in order to see what has been achieved and what tasks are remaining.

The Initiative is led by Franklin Allen of Imperial College and many activities will take place in cooperation with the Brevan Howard Centre for Financial Analysis.

Work streams

There are several avenues within financial regulation that this Initiative will explore.

Banking and Capital Markets (directed by Enrico Perotti)

  • Since the crisis we recognize that credit cycles develop in part independently from business cycles. A new conceptual framework is needed to ensure solid foundations for prudential policy. This insight is needed for the implementation of the new macroprudential policy approach introduced by Basel III, but also for the development of industry risk models over the cycle.
  • Specific issues on macroprudential regulation concern its relationship with monetary policy, and not least with quantitative easing measures. In particular, how does the housing market and capital flows are affected ?
  • An assessment is needed  on the cumulative impact of new regulation on return on equity in banking, and more generally on sustainable bank business models for the future.
  • What is the implementation path for liquidity regulation, and what is the role for private secured funding in perspective as central banks reduce their market participation ?
  • There are open issues on incentive structures and bank culture. How do incentive and remuneration structures work within financial institutions? Are there different approaches in different sectors of the markets? What is the risk culture of different types of institutions?
  • A key question is the development of EU securitization markets and ratings agencies, important for a good balance between capital markets and intermediaries. How do we get this market working in the EU again ? In the US securitization is ensured by active government-owned institutions in the residential real estate market. How can we increase price transparency, also on non real estate securitization ? Do ratings agencies make markets more efficient, and how do we regulate them? There is almost no empirical research on these issues outside the US.
  • Why have derivatives markets grown so enormously? Is at least some of this activity excessive, and should policy seek to limit it? What are the likely effects of introducing more transparency here? Are these markets potential or actual sources of instability, and might they amplify disturbances arising elsewhere in the financial system or the real economy?
  • The changing role of technology in finance is raising questions on how it can be regulated. How to respond to technological innovations such as new means of payment, such as bitcoins and Apple Pay? What does this mean for Data Protection?​

Long-term Financing of Industry (directed by Colin Mayer)

  • Capital markets: why does the size of the private non-financial bond market vary across Europe and why are certain parts of that market so much smaller than their US counterparts? How should we assess EU moves towards a ‘capital markets union’?

Insurance (directed by Ralph S. J. Koijen)

  • The macroeconomic role of insurance: what is the mechanism through which insurance contributes to economic growth? How does the long-term nature of insurance play into the economic cycle? How does the pooling and mutualisation process in place in modern insurance play as a redistributive tool – between individuals? Between generations? How is insurance instrumental/detrimental to innovation?
  • Insurance, systemic risk, and regulation: What are the sources of systemic risk in insurance? How are insurance companies interconnected with the rest of the financial system? Insurance companies do not create money: what are the consequences of this fact for systemic risk? How are derivatives used in insurance companies? Does this raise specific concerns? Which are the regulatory tools to be preferred to address and control potential systemic risk in insurance? What is the role of capital in insurance? How is capital being used in times of financial stress or failure?

Household Finance (directed by Michael Haliassos)

  • Interaction between financial markets and households: risk-taking of bank lenders is affected because households may not be capable of understanding the risk associated with some financial products. Lenders must gauge households’ ability to bear risk, affecting their risk decisions. But how far should regulators go in assuming households cannot understand products? Abandoning completely caveat emptor has potentially enormous costs.

Real estate markets (directed by Franklin Allen)

  • The nature and regulation of the housing market, interactions between banks and property markets. Capital requirements for real estate lending for banks and insurance companies are very different – should this be the case?
  • Commercial property has been at the root of many market crises, and conversion between housing and commercial properties continues to grow. Unlike residential housing, commercial properties can continue to absorb bad bank finance as firms will expand so long as they can receive bank lending.

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