Background and Key Themes

Since the collapse of Lehman Brothers, central banks and regulatory authorities in general have been confronted with difficult questions. The global financial crisis made apparent that the analytical models of the Great Moderation period failed to capture the changing nature of financial intermediation and the complex business models of transnational banks operating across different jurisdictions. In turn, despite few theoretical certainties with which to draw upon, central banks have played key roles in responding to the crisis and in trying to devise more adequate modes of regulation and intervention. First, in the immediate aftermath of the crisis, it was the central bank governors of Basel Committee member countries that amended the existing Basel II rules and methodologies for capital adequacy. Second, it was the Financial Stability Board, with much the same country membership as the Basel Committee and with central bank governors gathered around the negotiating table, which identified principles and guidelines for the resolution of distressed banks. And last but not least, it was the central banks that replaced conventional tools with new instruments and practices that extend their mandate and blur the traditional separation from private financial markets. For the past five years, central banks have intervened in both public and private debt markets, taking on functions of market makers or dealers of last resort. In this book, we propose to explore these developments and set them in the context of the European crisis.

The most comprehensive national regulatory response to the crisis came from the USA, where the Dodd–Frank Act specifically aimed at regulating the business models of banks by removing the risky proprietary trading from the investment banking activities in bank conglomerates and moving over-the-counter derivatives trading to the exchanges. The Vickers Report in the UK, too, aimed at separating investment banking from the retail banking activities of universal banks, but in a less clear way, by proposing the ring fencing of retail from investment banking. Such ring fencing would involve different capital-adequacy rules for retail and investment banking activities within the same bank holding company.