Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/283212 
Year of Publication: 
2023
Series/Report no.: 
Working Paper No. 1021
Publisher: 
Levy Economics Institute of Bard College, Annandale-on-Hudson, NY
Abstract: 
Since the nineties, crises have punctuated financial markets, shattering the conventional wisdom about how these markets work and how to regulate them, and forcing a deep rethinking of the supervisory framework that, however, did not change much of the banks' behavior and incentives. In particular, banking regulation did not face the nexus profitability-riskiness. Based on Minsky's financial instability hypothesis, we discuss the literature on banks' profitability and its relation to the originate-to-distribute model. We also propose a different strategy for banking regulation, based on a profitability cap that prevents financial innovation from overwhelming supervision. Finally, we discuss the data for the US case, confirming the importance of profitability as a signal of incoming troubles and the possibility of using the profitability cap to greatly simplify banking regulation.
Subjects: 
banking regulation
financial stability
Minsky
Basel 3
profitability
JEL: 
G01
G28
Document Type: 
Working Paper

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