Regulation Of Banks And Finance: Theory And Policy After The Credit Crisis

Regulation of Banks and Finance Also by Carlos M. Peláez and Carlos A. Peláez INTERNATIONAL FINANCIAL ARCHITECTURE: G7, IMF, BIS, Debtors and Creditors THE GLOBAL RECESSION RISK: Dollar Devaluation and the World Economy GLOBALIZATION AND THE STATE: Volume I GLOBALIZATION AND THE STATE: Volume II GOVERNMENT INTERVENTION IN GLOBALIZATION: Regulation, Trade and Devaluation Wars FINANCIAL REGULATION AFTER THE GLOBAL RECESSION Regulation of Banks and Finance Theory and Policy after the Credit Crisis Carlos M. Peláez and Carlos A. Peláez Carlos M. Peláez and Carlos A. Peláez 2009 All rights reserved. No reproduction, copy or transmission of this publication may be made without written permission. No portion of this publication may be reproduced, copied or transmitted save with written permission or in accordance with the provisions of the Copyright, Designs and Patents Act 1988, or under the terms of any licence permitting limited copying issued by the Copyright Licensing Agency, Saffron House, 6-10 Kirby Street, London EC1N 8TS. Any person who does any unauthorized act in relation to this publication may be liable to criminal prosecution and civil claims for damages. The authors have asserted their rights to be identified as the authors of this work in accordance with the Copyright, Designs and Patents Act 1988. First published 2009 by PALGRAVE MACMILLAN Palgrave Macmillan in the UK is an imprint of Macmillan Publishers Limited, registered in England, company number 785998, of Houndmills, Basingstoke, Hampshire RG21 6XS. Palgrave Macmillan in the US is a division of St Martin’s Press LLC, 175 Fifth Avenue, New York, NY 10010. Palgrave Macmillan is the global academic imprint of the above companies and has companies and representatives throughout the world. Palgrave® and Macmillan® are registered trademarks in the United States, the United Kingdom, Europe and other countries. ISBN: 978–0–230–23903–6 hardback This book is printed on paper suitable for recycling and made from fully managed and sustained forest sources. Logging, pulping and manufacturing processes are expected to conform to the environmental regulations of the country of origin. A catalogue record for this book is available from the British Library. A catalog record for this book is available from the Library of Congress. 10 9 8 7 6 5 4 3 2 1 18 17 16 15 14 13 12 11 10 09 Printed and bound in Great Britain by CPI Antony Rowe, Chippenham and Eastbourne To Magnolia and Penelope This page intentionally left blank Contents List of Illustrations x List of Abbreviations xi Acknowledgments xiv Introduction: Scope and Contents 1 1 The Theory of Regulation and Finance Introduction The public interest view The first best Monopoly Externalities Market failures The private interest view Government failure The economic theory of regulation The second best Applied welfare economics Property rights The new institutional economics Asymmetry of information The modified capture theory Finance, efficiency, and growth Summary 4 4 4 5 9 14 15 18 18 20 24 27 32 33 35 36 37 44 2 Functions and Regulation of Deposit Banks Introduction Regulation Bank functions Microeconomics of banking Monitoring Liquidity Transformation services Capital requirements Bank fragility 45 45 45 51 52 55 57 58 60 61 vii viii Contents Empirical ana