Exploring The Consequences Of Regulatory Changes On The Banking Money Cycle (original) (raw)

The Impact of Regulatory Policies on the Flow of Money in the Banking System

The flow of money within the banking system is profoundly influenced by regulatory policies, which are essential for maintaining economic stability, promoting growth, and ensuring the safety and soundness of financial institutions. These policies, instituted by government bodies and regulatory agencies, shape the behavior of banks through guidelines on capital requirements, reserve ratios, lending practices, and risk management. At the same time, the theory of the money cycle provides a framework for understanding how these regulatory influences affect the broader economy by differentiating between enforcement savings, which strengthen the local economy, and escape savings, which divert funds away from it.

Understanding The Money Cycle - How Regulation Policies Shape Our Financial Landscape

Most of us may not realize how deeply intertwined our financial decisions are with regulatory policies. In exploring the money cycle, I aim to highlight how enforcement and escape savings influence economic vitality, demonstrating that the policies governing our economy play a significant role in facilitating or hindering this cycle. By examining the delicate balance between large corporations and small businesses, I invite you to understand how monetary flow affects not only economic capacity but also the very structure of our financial landscape.

Understanding the Money Cycle – How Regulation Policies Shape Financial Flows

Regulation plays a pivotal role in shaping how money circulates within an economy. As I explore the dynamics of the money cycle, you’ll discover how enforcement and escape savings influence financial flows. By understanding the impact of regulatory policies on banking systems, I aim to shed light on how we can optimize economic structures for greater efficiency and stability. This exploration will help you appreciate the intricate relationship between regulation and financial health, revealing the mechanisms that drive your economy's performance.

Policies and prescriptions for safe and sound banking: shocks, lessons, and prospects

Economic review (Federal Reserve Bank of Atlanta)

B oth the external environment and the internal business practices of banking in the United States changed enormously over the past two decades. (For simplicity, I refer here to any federally insured depositories and their holding companies as banks.) By the middle of the 1980s, the U.S. macroeconomy had suffered through its most turbulent years since the 1930s. Then, seemingly suddenly, real economic activity became much less volatile beginning about the middle of the 1980s. Because some of the public policies that might have been appropriate under different circumstances had become outmoded and provided inappropriate incentives for risk taking, numerous and substantial legislative and regulatory changes were enacted. Financial deregulation was both deep and broad and greatly affected both regulated institutions and regulators. Technological advances in computing and communications that were pertinent to banking lowered the relative prices of such services considerably. Advances in financial techniques and in the ranges of financial products and services offered by, and offered to, banks importantly affected the risks that banks faced and measured as well as the kinds and amounts of risks that banks ultimately decided to retain or to shed.

Banking regulation in the United States after the world economic crisis of 2007/2008: economic immunity or false hopes

Brazilian Keynesian Review

Based on the Post-Keynesian approach, we argue that commercial banks, through the financial reforms of 1980 and 1999, which made financial institutions more flexible, increased their capacity to operate in the capital market by becoming Banking Financial Holding Companies. The 2007/2008 crisis is understood as a consequence of financial deregulation and financial innovation process that weakened the Federal Reserve's capacity to restrain banking activity. Initially, we discuss the new institutional context that emerged from these changes in the financial regulatory framework between 1980 and 1999. Then, we focus on how financial deregulation allowed banking business to advance in financial markets, how this process contributed to the economic crisis of 2007, characterized both as a liquidity crisis and a solvency crisis, safeguarded by the National States. Finally, we analyze the Dodd-Frank Law (2010), which is interpreted as the reaffirmation of this endogenous process of finan...

Understanding the Money Cycle – How Regulation Policies Shape Financial Flow

Regulation plays a vital role in shaping the flow of money within our economies. I invite you to explore how the intricate relationship between enforcement and escape savings influences financial activity. By examining regulatory policies, we can uncover how they impact business investments, savings behavior, and ultimately the structural health of economic systems. Your understanding of these dynamics not only enhances your grasp of financial principles but also empowers you to appreciate the broader implications of monetary policies in fostering a robust economy.

Macro-effects of higher capital and liquidity requirements for banks

2010

The crisis has demonstrated that the ability of banks to absorb shocks needs to be strengthened. The financial tensions that have emerged repeatedly since 2007 could assume such serious proportions because the exposure of the banks was too high and too risky in relation to their capital reserves. As a result, they had too little capacity to absorb the losses on the market positions they had taken and on the loans they had granted. Banks were forced to respond by reducing their highrisk positions. The liquidity buffers held by banks were also generally inadequate, making them vulnerable when market liquidity dried up. Against this backdrop, investors lost confidence at the height of the crisis in the autumn of 2008, and governments had to step in by recapitalising some banks and guaranteeing bank debts. Central banks made liquidity more readily available because the banks were unable to raise funding in the markets, including the interbank market.

Post-crisis regulatory reform in banking: Address insolvency risk, not illiquidity!

Journal of Financial Stability, 2018

An extensive review of the evidence related to the 2007-09 crisis reveals that it was an insolvency risk crisis, not a liquidity crisis. The appropriate post-crisis regulatory reform should therefore focus on increasing capital requirements. The Basel III liquidity requirements do not serve a useful economic purpose in dealing with the root causes of the stresses that led to the 2007-09 crisis, and unnecessarily constrain the asset transformation and liquidity creation roles of banks to the detriment of economic growth.

The Rise of Shadow Banking: Evidence from Capital Regulation

Review of Financial Studies 34(5), 2181-2235 (editor's choice), 2021

We investigate the connections between bank capital regulation and the prevalence of lightly regulated nonbanks (shadow banks) in the U.S. corporate loan market. For identiffcation, we exploit a supervisory credit register of syndicated loans, loan-time fixed-effects, and shocks to capital requirements arising from surprise features of the U.S. implementation of Basel III. We find that less-capitalized banks reduce loan retention, particularly among loans with higher capital requirements and at times when capital is scarce, and nonbanks step in. This reallocation has important spillovers: during the 2008 crisis, loans funded by nonbanks with fragile liabilities are less likely to be rolled over and experience greater price volatility. Review of Financial Studies (2021), 34(5), 2181-2235. DOI: https://doi.org/10.1093/rfs/hhaa106 This is an Open Access article distributed under the terms of the Creative Commons Attribution License (http://creativecommons.org/licenses/by/4.0/), which permits unrestricted reuse, distribution, and reproduction in any medium, provided the original work is properly cited.