Agenda and Criteria for Financial Regulatory Reform
Working Paper #181
D'Arista and Griffith-Jones stress the seeming contradiction that the more liberalized the financial system is, the greater the need for more effective regulation, to avoid massive and costly crises. The paper develops the two basic principles on which such future financial regulation should be based. The first principle is counter-cyclicality. It aims at correcting the main manifestation of market failures in banking and financial markets: their boom-bust nature. The key idea is that (forward-looking) provisions and/or capital required should increase as risks are incurred, that is when loans grow more, and fall when loans expand less. The application of this principle in Spain and Portugal shows that it is possible to design simple rules to make it effective.
About the Authors
Political Economy Research Institute
Financial Markets Program Director
Initiative for Policy Dialogue (IPD)
Stephany Griffith-Jones is an economist specialising in international finance and development, with emphasis on reform of the international and national financial system, especially in relation to financial regulation and global governance. She is Financial Markets Director at the Initiative for Policy Dialogue, Columbia University. Previously she was Professorial Fellow at the Institute of Development Studies at Sussex University. She was Director of International Finance at the Commonwealth Secretariat and worked at UN DESA and ECLAC. She was senior consultant to governments in Eastern Europe, Latin America and Africa and many international agencies, including the World Bank, the IADB, the European Commission, UNDP and UNCTAD. She was a member of the Warwick Commission on financial regulation. She currently is theme leader on finance in the ESRC /DFID growth programme for LICs, especially African ones. She has published over 20 books and many scholarly and journalistic articles. Her books include Time for the Visible Hand, Lessons from the 2008 crisis, edited jointly with José Antonio Ocampo and Joseph Stiglitz.