Abstract
Supervision cannot prevent market disturbances, potentially causing a crisis. It retains its impact through long-term measures making the banking system more resilient to externals shocks. This process consists of five steps: setting standards, licencing, oversight, rectifying action and firefighting. The supervision is the application of those five steps in a coordinated manner. Performed in the correct order, they enable banks to withstand shocks without causing them. However, the regulatory requirement should be so balanced that investment in bank shares remains attractive. Otherwise, banks cannot raise the capital and meet the requirements.
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Notes
- 1.
“…predicting important discrete events may be a form of charlatanism. In perhaps 99 out of 100 cases, we are likely to be wrong.” (Milanović, 2016).
- 2.
eToro (2019).
- 3.
Posen (2006).
- 4.
The dynamic of the market would usually follow two laws declared by King (2017, p. 34):
“First law of financial crises: an unsustainable position can continue for far longer than you would believe possible.”
“Second law of financial crises: when an unsustainable position ends it happens faster than you could imagine.”.
- 5.
See glossary—Bubble.
- 6.
“The LCTM risk model told them that the loss they incurred on one day at the end of August 1998 should have occurred once every 80 trillion years. It happened again the following week.” (Engler & Essinger, 2000, p. 127).
- 7.
Glossary—Risk weights.
- 8.
Glossary—Concentration risk.
- 9.
Glossary: The resilience of the alternative regulatory structure.
- 10.
Standardised approach.
- 11.
“There is no legitimate reason for the proposed Basel III requirements to be so outrageously low. These requirements reflect the political impact that the banks have had on the policy debate” (Admati & Hellwig, 2014, p. 179).
References
Admati, A., & Hellwig, M. (2014). The bankers’ new clothes, Princeton University Press.
Engler, H., & Essinger, J. (2000). The future of banking, Reuters Limited.
eToro. (2019). www.etoro.com. Retrieved from https://www.etoro.com.
King, M. (2017). The end of alchemy: Money, banking and the future of the global economy, W W Norton & Company. ISBN 0393353575.
Milanović, B. (2016). Global inequality, Belknap Press, An Imprint of Harvard University Press. ISBN 978-0674984035.
Posen, A. S. (2006, March). Why Central Banks should not burst bubbles. International Finance, 109–124.
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Odak, D. (2020). How Can Supervision Prevent Financial Crises?. In: A Political Economy of Banking Supervision. Springer, Cham. https://doi.org/10.1007/978-3-030-48547-4_6
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DOI: https://doi.org/10.1007/978-3-030-48547-4_6
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