Rethinking Financial Stability

62 Pages Posted: 27 Feb 2018

See all articles by David Aikman

David Aikman

Bank of England - Monetary Assessment and Strategy Division

Andrew Haldane

Bank of England

Marc Hinterschweiger

Bank of England

Sujit Kapadia

European Central Bank (ECB); Bank of England

Date Written: February 23, 2018

Abstract

The global financial crisis has been the prompt for a complete rethink of financial stability and policies for achieving it. Over the course of the better part of a decade, a deep and wide-ranging international regulatory reform effort has been under way, as great as any since the Great Depression. We provide an overview of the state of progress of these reforms, and assess whether they have achieved their objectives and where gaps remain. We find that additional insights gained since the start of the reforms paint an ambiguous picture on whether the current level of bank capital should be higher or lower. Additionally, we present new evidence that a combination of different regulatory metrics can achieve better outcomes in terms of financial stability than reliance on individual constraints in isolation. We discuss in depth several recurring themes of the regulatory framework, such as the appropriate degree of discretion versus rules, the setting of macroprudential objectives, and the choice of policy instruments. We conclude with suggestions for future research and policy, including on models of financial stability, market-based finance, the political economy of financial regulation, and the contribution of the financial system to the economy and to society.

Keywords: Financial stability, macroprudential policy, Basel III, capital requirements, liquidity requirements

JEL Classification: G01, G18, G21, G28

Suggested Citation

Aikman, David and Haldane, Andrew and Hinterschweiger, Marc and Kapadia, Sujit, Rethinking Financial Stability (February 23, 2018). Bank of England Working Paper No. 712, Available at SSRN: https://ssrn.com/abstract=3130053 or http://dx.doi.org/10.2139/ssrn.3130053

David Aikman (Contact Author)

Bank of England - Monetary Assessment and Strategy Division ( email )

Threadneedle Street
London EC2R 8AH
United Kingdom

Andrew Haldane

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

Marc Hinterschweiger

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

Sujit Kapadia

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom
020-7601-5507 (Phone)

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