Stefano Micossi

The Global Financial Crisis: Causes and Cures

The massive financial instability of 2007–08 was, in the main, the result of lax monetary policy. Regulation compounded this error by allowing and encouraging excessive leverage and maturity transformation by banks. Innovation did contribute to reckless credit expansion and investments, but without lax money and excessive leverage, reckless bets on asset price increases would not have been possible. Therefore, a repeat of this instability could be avoided by correcting these two policy faults. There is no need for intrusive rules constraining non-bank intermediaries and financial innovation. The main message is: keep it simple.

Keep It Simple: Policy Responses to the Financial Crisis

With the aim of restoring a strong global framework for economic governance, this study proposes new rules of the game - imposed through the Group of 20 and the IMF - for the macroeconomic and exchange rate policies of the main players, including the United States. It also advocates stricter prudential rules for banks, centred around the introduction of a simple leverage ratio calculated with reference to total assets, with no exemptions or risk mitigation. The authors warn against the risk of a massive wave of new regulation, which is not needed and might cripple capital markets for years, and call instead for a simplification and a better enforcement of rules. Carmine Di Noia is Deputy Director General of Assonime and member of the European Securities Markets Expert Group (ESME) at the European Commission. Stefano Micossi is Director General of Assonime, Professor at the College of Europe and a member of CEPS Board of Directors. Jacopo Carmassi is a researcher at Assonime and Fellow of the Wharton Financial Institutions Center. Fabrizia Peirce is an economist in Assonimes economic unit.

Time to Set Banking Regulation Right

Excessive leverage and risk-taking by large international banks were the main causes of the 2008-09 financial crisis and the ensuing sharp drop in economic activity and employment. World leaders and central bankers promised that it would not happen again and, to this end, undertook to overhaul banking regulation, first and foremost by rectifying Basel prudential rules. This study argues that the new Basel III Accord and the ensuing EU Capital Requirements Directive IV fail to correct the two main shortcomings of international prudential rules: 1) reliance on banks’ risk management models for the calculation of capital requirements and 2) the lack of accountability by supervisors. Accordingly, the authors propose the calculation of capital requirements without risk adjustment and creation of a system of mandated action by supervisors modelled on the US framework of Prompt Corrective Action (PCA). They also recommend that banks should be required to issue large amounts of debentures that are convertible into equity in order to strengthen market discipline on management and shareholders.