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Banking regulation after the crisis: a Minskyan analysis

Grant number: 14/03839-4
Support type:Scholarships abroad - Research
Effective date (Start): August 01, 2014
Effective date (End): July 21, 2015
Field of knowledge:Applied Social Sciences - Economics - Fiscal and Monetary Policies
Principal researcher:Simone Silva de Deos
Grantee:Simone Silva de Deos
Host: Jan Kregel
Home Institution: Instituto de Economia (IE). Universidade Estadual de Campinas (UNICAMP). Campinas , SP, Brazil
Research place: Bard College, United States  

Abstract

The effects of the financial crisis that began in 2007 in the United States, and has gained international and systemic dimension from 2008 to the present, are noticeable internationally, with deep impacts on the real economy and society. The crisis made explicit, in one hand, the enormous complexity and high degree of connection of financial systems. On the other hand, it became evident the precariousness and especially the inadequacy of institutions and policies for the regulation and supervision of opaque and deep contemporary finance. A consistent analysis of the new banking regulation (Basel III) requires, as a starting point, a review of its theoretical foundations. Although often the literature on the subject, particularly the documents of regulators themselves, makes it explicit, a more accurate analysis makes their fundamentals clear. Accordingly, in the words of the chairman of the Basel Committee (Wellink, 2011), the aim of the new regulation is to strengthen the resilience of the individual banks and of the system as a whole to unexpected shocks and, thereby, to promote financial stability. Thus, it is important to note that, despite the introduction of some important changes in the new regulations (Basel III) relatively to the standard previously in force (Basel II), the central theoretical foundation - namely, the idea that market forces tend to equilibrium and that crises are, in this sense, exogenous shocks, results of market failures - persists. Radically different is the analysis of the crisis built from Minsky (Kregel, 2010; Wray, 2011; Tymoigne & Wray, 2014). His central hypothesis (Financial Instability Hypothesis - FIH) about the functioning of capitalist economies that have developed financial systems, which is the basis of the crisis analysis of the authors cited above, is that the dominant financial position in the economy changes along its expansion cycle, with a growing presence of speculative and highly speculative (Ponzi) agents. Thus, the longer the expansion, the more the economy weakens. In this sense, financial instability is an expected result, endogenous, and in no way corresponds to a "market failure", or an "unexpected shock". As pointed out by Kregel (2010), FIH is embedded within a more general view, radically distinct from the approach taken by conventional economics. For Minsky, the behavior of the economic system, with respect to their real variables, is not independent from financial structures. In this context, this project's general aim is to critically analyze, from a Minskyan framework, the central aspects of the regulatory framework that was forged after the crisis and in response to this, as explicit in the new Basel Accord (Basel III), which is being implemented, with local specificities, internationally. Among the specific goals of the research are: i) to review the contributions of Minsky and post-Keynesian authors on financial fragility, financial instability and banking regulation, with emphasis on the most recent contributions of post-Keynesian authors, ii) to understand in what sense is the banking system reorganizing after the crisis and in reaction to the new regulation, in the central economies as well as in a broader international perspective; iii) to analyze, in the light of Minsky and post Keynesian authors, the new regulatory framework in the United States (Dodd-Frank Act); iv) to asses, in the light of the theoretical framework afore mentioned and taking in consideration the recent changes in the banking sector, the implementation of Basel III in Brazil. (AU)

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