EconStor >
University of California (UC) >
UC Santa Cruz, Santa Cruz Institute for International Economics (SCIIE) >
Working Papers, Santa Cruz Institute for International Economics, UC Santa Cruz >

Please use this identifier to cite or link to this item:

http://hdl.handle.net/10419/64087
  
Title:On the paradox of prudential regulations in the globalized economy. International reserves and the crisis: a reassessment PDF Logo
Authors:Aizenman, Joshua
Issue Date:2009
Series/Report no.:Working Papers, Santa Cruz Center for International Economics 09-01
Abstract:This paper discusses two pertinent policy issues dealing with the global liquidity crisis - global prudential regulation reform, and reassessment of using international reserves in the crisis. We point out the paradox of prudential regulations while the identity of economic actors that benefited directly from crises avoidance is unknown, the cost and the cumbrance of regulations are transparent. Hence, crises that had been avoided are imperceptible and are underrepresented in the political discourse, and the demand for prudential regulations declines during prolonged good times, thereby increasing the ultimate cost of eventual crises. While the seeds of the present crisis were mostly home grown, international flows of capital magnified its costs. Global financial integration produces the by-product of regulatory arbitrage” capital tends to flow to underregulated countries, frequently resulting in excessive risk taking, in anticipation of future bailout. Dealing with regulatory arbitrage” requires coordinated prudential regulations that should apply as equally as possible to domestic and foreign players. A coordinated globalized prudential regulation, by increasing the cost of prudential deregulation, would mitigate the temptation to under-regulate during prolonged good-times, thus adding a side benefit. We also analyze the different approaches to the use of reserves during the crisis and what this means for the global financial system. The deleveraging trigged by the crisis implies that countries that hoarded reserves have been reaping the benefits. The crisis illustrates the importance of the self insurance provided by reserves, as well as the usefulness of policies that channel a share of the windfall gains associated with improvements in the terms-of-trade to reserves and sovereign wealth funds. The reluctance of many developing countries to draw down on their reserve holdings raises the possibility that they may now suffer less from the fear of floating” than from afear of losing international reserves”, which may signal deterioration in the credit worthiness of a country.
Subjects:global prudential regulation
regulatory arbitrage
fear of losing international reserves
swap lines
JEL:F15
F33
F36
F55
Document Type:Working Paper
Appears in Collections:Working Papers, Santa Cruz Institute for International Economics, UC Santa Cruz

Files in This Item:
File Description SizeFormat
604538448.pdf68.37 kBAdobe PDF
No. of Downloads: Counter Stats
Download bibliographical data as: BibTeX
Share on:http://hdl.handle.net/10419/64087

Items in EconStor are protected by copyright, with all rights reserved, unless otherwise indicated.