Arnold Kling

Financial Regulation Links

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The Economist has a roundtable on Raghuram Rajan's analysis suggesting that regulatory policy should be countercyclical rather than procyclical. I contributed to the discussion, writing


I think that Mr Rajan is off base when he suggests trying to make the regulatory process more uniform in order to close gaps. If we do that, then my guess is that it will only serve to induce a sense of false complacency among investors and regulators.

I then outline my "easy to fix" alternative.

Felix Salmon finds a Goldman Sachs analysis of the regulatory arbitrage involved in securitization. That is something I have referred to many times, including my contribution to the Rajan Roundtable.


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COMMENTS (3 to date)

I hate to so shamelessly flog a not-yet-born horse (it is at the typesetter), but in our forthcoming special issue on the causes of the financial crisis we have not one but two papers painstakingly justifying Arnold's claim that "the demand for AAA-rated paper was created by the regulatory regime of the Basel capital accords."

Those interested in ordering individual or classroom copies of the issue should contact me.

Jeffrey Friedman, critical.rev@gmail.com
Editor, Critical Review
www.criticalreview.com

AdMi writes:

Creating that demand where, though? I was of the understanding that only Basel II put faith in ratings agencies, and the only American banks that adopted Basel II were using the IRB approach, which used internal models rather than credit ratings. Was the demand mostly international?

No, Basel I was just as bad on that. AAA-rated securities, including GSE securities, took a 60 percent lower capital charge than, say, a regular mortgage.

Jeff

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