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

In the years following the 2007-2008 global financial crisis, new regulations were implemented to stabilize and transform the banking industry. These regulations aimed to decrease bank risk and improve transparency, control, and organization in their balance sheets. Key regulations included higher capital requirements, stricter leverage ratios, ring-fencing of investment banking operations, improved resolution frameworks, and rules requiring banks to hold more liquid assets. Banks argue that these regulations have limited their ability to take risks that support the real economy, potentially leading to the growth of large shadow banking institutions. Financial theory can offer guidance on how banks can adapt to these new regulations. Banks that have been operating under various constraints on their balance sheet capacity will need to adjust their behavior in different ways to meet specific regulatory requirements. These new incentives provide insight into the potential consequences of the changed foundations for private money creation, as well as the necessary policy moves to benefit the institutions, regulators, and market participants involved.