Good Regulation, Bad Regulation: The Anatomy of Financial Regulation

261 Pages·2015·2.244 MB·English

by  Imad A. Moosa (auth.)

Palgrave Macmillan Studies in Banking and Financial Institutions
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Good Regulation,
Bad Regulation
The Anatomy of Financial Regulation
Imad A. Moosa
Professor of Finance, Royal Melbourne Institute of Technology (RMIT), Australia
© Imad A. Moosa 2015
Softcover reprint of the hardcover 1st edition 2015 978-1-137-44709-8
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ISBN 978-1-349-68593-6 ISBN 978-1-137-44710-4 (eBook)
DOI 10.1007/978-1-137-44710-4
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To my fellow citizens of the world, the victims of
fraud and corruption who lost their homes, jobs
and livelihoods in the name of the free market
Lest we forget
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Contents
Preface and Acknowledgements x
List of Abbreviations xi
1 Definition and Theories of Regulation 1
1.1 Definition of Regulation 1
1.2 Forms of Regulation 4
1.3 The Public Interest Theory of Regulation 7
1.4 The Capture Theory of Regulation 9
1.5 The Special Interest Groups Theory of Regulation 13
1.6 Concluding Remarks 14
2 Arguments for and against Regulation 16
2.1 Introduction 16
2.2 Avoiding Corporate Failure 17
2.3 Creature of the State 17
2.4 Market Failure 18
2.5 The Protection of Rights 20
2.6 Efficiency 20
2.7 Impeding Innovation 21
2.8 The Cost of Compliance 22
2.9 Circumvention of Regulation 23
2.10 Ineffectiveness 24
2.11 Corruption as a Justification for Financial Regulation 24
2.12 The Greed Game 28
2.13 Concluding Remarks 29
3 Regulation, Deregulation and Financial Crises 31
3.1 The Free-Market Doctrine 31
3.2 Free Banking and Financial Laissez-Faire 40
3.3 Regulation and Banking Efficiency:
The Empirical Evidence 43
3.4 Deregulation as a Cause of Financial Crises 48
3.5 Concluding Remarks 55
4 Good Regulation: Payday Loans, Securitisation
and Insider Trading 56
4.1 What is Good Regulation? 56
vii
viii Contents
4.2 Payday Loans 57
4.3 Arguments for and against the Regulation of
Payday Loans 59
4.4 Securitisation and Derivatives 62
4.5 Insider Trading 70
5 Good Regulation: Leverage and Liquidity 78
5.1 The Leverage Ratio: Why Does it Matter? 78
5.2 Leverage as a Cause of the Global Financial Crisis 81
5.3 The Basel 3 Leverage Ratio 83
5.4 Arguments for and against the Leverage Ratio 85
5.5 The Concept of Liquidity 87
5.6 The Role of Liquidity in the Global Financial Crisis 90
5.7 Arguments for the Regulation of Liquidity 94
6 Bad Regulation: Basel 1 and Basel 2 98
6.1 The Basel 1 Accord 98
6.2 From Basel 1 to Basel 2 104
6.3 A Critical Evaluation of Basel 2 106
6.4 Basel 2 and the Global Financial Crisis 117
6.5 Conclusion 119
7 Bad Regulation: Basel 2.5 and Basel 3 121
7.1 From Basel 2 to Basel 2.5 121
7.2 A Critique of Basel 2.5 124
7.3 Basel 2 to Basel 3 128
7.4 The Basel 3 Provisions 129
7.5 A Critique of Basel 3 132
7.6 The Verdict on Basel 3 and the Basel Culture 135
7.7 Conclusion 139
8 Bad Regulation: Short Selling 141
8.1 Introduction 141
8.2 Some Preliminary Remarks 142
8.3 The Past and Present of Short Selling 145
8.4 Arguments for Short Selling 148
8.5 Arguments against Short Selling 154
8.6 The Regulation of Short Selling: A Critique 160
8.7 Naked versus Covered Short Selling 165
8.8 Conclusion 167
9 Bad Regulation: High-Frequency Trading 168
9.1 Regulating the Unknown 168
9.2 What is HFT? 169
Contents ix
9.3 The Proclaimed Profitability of HFT 174
9.4 HFT as the Cause of the Flash Crash 179
9.5 Arguments against HFT 180
9.6 The Case for and against the Regulation of HFT 188
9.7 Conclusion 190
10 Bad Regulation: Too Big to Fail, Bail-Out and Bail-In 192
10.1 Introduction 192
10.2 The Concept of TBTF 193
10.3 Evolution of the TBTF Doctrine 194
10.4 Arguments for TBTF 196
10.5 Arguments against TBTF 198
10.6 Dealing with the Menace of TBTF 201
10.7 Bail-Out versus Bail-In 208
10.8 Conclusion 210
11 Concluding Remarks 212
11.1 Recapitulation 212
11.2 What is Good Regulation? 213
11.3 Corruption as a Cause of Instability and Crises 214
11.4 Banks Always Win 215
11.5 Taleb’s Ten Commandments 216
11.6 Light at the End of the Tunnel? 218
References 220
Index 240