Can It Be Prevented This Time? The Role of Profits in Banking Regulation

Lorenzo Esposito, Giuseppe Mastromatteo

Risultato della ricerca: Working paper

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.
Lingua originaleEnglish
EditoreLevy Economics Institute
Numero di pagine32
ISBN (stampa)ISSN 1547-366X
Stato di pubblicazionePubblicato - 2023

Keywords

  • Minsky
  • banking regulation
  • financial stability

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