Financial Regulation after the Crisis: How Did We Get Here, and How Do We Get Out?

Following the global financial crisis of 2007–09, regulatory authorities either are or should be engaging in a fundamental reconsideration of how they approach financial regulation and supervision. This paper briefly summarizes the present international consensus on regulation as embodied in the Basel framework. It looks at how we came to be in such a situation, and proposes a restart of the process organized by the Basel Committee on Bank Supervision. The paper reviews the flaws of that framework and concludes that its weaknesses are fundamental, in its neglect of the endogeneity of risk to the regulatory structure, and of the dynamic nature of finance and thus of its regulation as well. Neither a static rule book nor an increasingly complex one will ever provide financial safety and soundness. I make specific recommendations, starting with abandoning risk weights and adopting a simple leverage rule, supplemented by conditional convertible debt and some simple rules. More radically, I urge a different approach, one that focuses on the oversight and accountability of regulators and greater transparency for both banks and the regulatory process.