AN INCENTIVE-ROBUST PROGRAMME FOR FINANCIAL REFORM

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Errata

This article is corrected by:

  1. Errata: ERRATUM Volume 80, Issue 2, 262, Article first published online: 21 February 2012

  • Note: Correction added on 31 January 2012 after first publication online on 1 September 2011.

  • On Abstract, the word ‘recognize’ before ‘losses’ was omitted. On page 59, the words ‘strict prior’ should read ‘strict priority’ and on page 66, the word ‘regulatory’ should be changed to ‘regulator’. The errors have been corrected in this version of the article.

Abstract

Leading up to the recent crisis, government encouraged risky lending, and failed to measure banks' risks credibly or to require sufficient capital. Regulators also failed to recognize losses or enforce intervention protocols for timely resolution. This paper proposes radical policy changes to prevent a recurrence. The need is not for more complex rules and more supervisory discretion, but rather for simpler rules that are meaningful in measuring and limiting risk, hard for market participants to circumvent and credibly enforced by supervisors. Ten ‘incentive-robust’ regulatory reform proposals are developed that together would constitute the beginning of an effective new regime.

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