DP11147 Financial Regulation in Europe: Foundations and Challenges

Author(s): Thorsten Beck, Elena Carletti, Itay Goldstein
Publication Date: March 2016
Keyword(s): Banking, Basel III, financial stability, regulation
JEL(s): G21, G28
Programme Areas: Financial Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=11147

This chapter discusses recent regulatory reforms and relates them to different market failures in banking, based on the recent theoretical and empirical literature with focus on insights from the recent crisis. We also provide a broader discussion of challenges in financial sector regulation, related to the regulatory perimeter and financial innovation as tools financial market participants use to evade tighter regulatory frameworks. We argue for a dynamic view of regulation that takes into account the changing nature of risk-taking activities and regulatory arbitrage efforts. We also stress the need for a balanced approach between complex and simple tools, a strong focus on systemic in addition to idiosyncratic regulation, and a stronger emphasis on the resolution phase of financial regulation.