Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/103462
Authors: 
Pagano, Marco
Year of Publication: 
2014
Series/Report no.: 
CFS Working Paper Series 486
Abstract: 
This paper distils three lessons for bank regulation from the experience of the 2009-12 euro-area financial crisis. First, it highlights the key role that sovereign debt exposures of banks have played in the feedback loop between bank and fiscal distress, and inquires how the regulation of banks' sovereign exposures in the euro area should be changed to mitigate this feedback loop in the future. Second, it explores the relationship between the forbearance of non-performing loans by European banks and the tendency of EU regulators to rescue rather than resolving distressed banks, and asks to what extent the new regulatory framework of the euro-area "banking union" can be expected to mitigate excessive forbearance and facilitate resolution of insolvent banks. Finally, the paper highlights that capital requirements based on the ratio of Tier-1 capital to banks' risk-weighted assets were massively gamed by large banks, which engaged in various forms of regulatory arbitrage to minimize their capital charges while expanding leverage. This argues in favor of relying on a set of simpler and more robust indicators to determine banks' capital shortfall, such as book and market leverage ratios.
Subjects: 
bank regulation
euro
financial crisis
sovereign exposures
forbearance
bank resolution
bank capital requirements
JEL: 
G01
G21
G28
G33
Persistent Identifier of the first edition: 
Document Type: 
Working Paper

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