Regulatory reform and financial stability

Citation

Barth, J. and Jahera, J. (2009), "Regulatory reform and financial stability", Journal of Financial Economic Policy, Vol. 1 No. 4. https://doi.org/10.1108/jfep.2009.41601daa.001

Regulatory reform and financial stability

Article Type: Editorial From: Journal of Financial Economic Policy, Volume 1, Issue 4

The global financial crisis has led to a reexamination of regulatory policies around the globe as countries seek strategies to minimize, if not avoid, the likelihood and severity of future crises. The difficulty that exists is in identifying the fundamental causes of the crisis so that appropriate reforms can be implemented. A problem that arises in this regard is that policymakers frequently feel the need to take action quickly and willingly do so without a complete understanding of the causes or even the long-run effects of their actions. This can lead to inappropriate reforms, and even reforms that make matters worse. The history of financial regulation in the USA is that major reforms are all too often a response to a crisis rather than undertaken to head-off a crisis.

At present, there are at least two basic issues that merit attention. The first concerns the regulatory structure that works best to promote financial stability and the second centers on the more specific set of regulations that fit within that structure. Some argue for a fairly simple structure with one or a few regulatory authorities while others prefer a more diverse group of authorities to match the different types of financial firms in the marketplace. In terms of the regulations themselves, one argument is that more regulations are necessary to prevent excessive risk-taking behavior. The counter argument is that fewer regulations are needed to allow financial institutions greater scope to compete effectively in the global market and at the same time placing more emphasis on market discipline to contain risk taking. The current outlook favors more regulatory authorities with greater powers over more financial firms.

In addition to regulatory reform, budgetary issues in many countries are the focus of substantial attention. In the USA, for instance, many of the states are suffering severe budgetary shortfalls, which puts legislatures in the unpleasant position of having to cut expenditures and/or increase taxes, neither of which tend to be popular with voters. The federal government is also grappling with large and potentially growing budget deficits in the coming years. A similar situation is occurring in many other countries, with some already moving to cut services and increase revenues. The budgetary troubles in Greece have not only contributed to social unrest but also have raised broader issues for all the European Union countries, especially those that have adopted the euro as their currency.

What all this means is that there are more than ample opportunities to conduct research that can contribute to helping shape policy decisions in countries everywhere on a wide variety of important financial and economic topics.

Editorial policy

Our editorial policy is to publish research that covers a broad range of topics that can help promote better financial and economic policies, whether at the government or corporate level. The journal, therefore, looks forward to receiving papers that will meaningfully contribute to accomplishing this goal.

Papers in this issue

We are pleased to publish four papers in this issue of the journal. The first paper is written by Abdelkader Boudriga, Neila Boulila Taktak, and Sana Jellouli and examines the relationship between risk, as measured by nonperforming loans, and various bank characteristics in a cross-border analysis that includes 59 countries. The main results support the findings from other earlier work in the area. In terms of policy implications, the authors suggest that foreign ownership can serve to reduce the credit risk of banks in less-developed countries but not in the more developed countries. Overall, the results indicate that policymakers need to consider the stage of development in a specific country when deciding upon the appropriate means to manage bank risk.

The second paper, by Alexis Penot and Grégory Levieuge, provides a comparison between the European Central Bank (ECB) and the US Federal Reserve (Fed) in terms of the reaction to situations resulting in changes in interest rates. Using a value at risk methodology, the authors conclude that the ECB is not necessarily less reactive than the Fed but rather is affected by country-specific economic issues.

Mikael Bask, in the third paper, presents an analytical examination of monetary policy as it relates to currency trading for a small open economy. His results offer an addition to prior research that focuses on such relationships. More specifically, Bask examines monetary policy as it relates to trend following in currency trading. Of interest also is consideration of how an economy responds to a shock. He finds that the effect of a shock is greater for inflation when flexible inflation targeting is utilized.

In the fourth paper, Aleš Bulí Ÿ and Jaromír Hurník provide a study of disinflation policies in several high-inflation euro area countries. Further, they consider disinflation policies using simulation analysis. Their results have implications for the Maastricht criterion, which was intended to provide some means of maintaining consistent inflation rates among the euro countries. However, the results show that high-inflation countries exhibited a V-shape with declines in inflation initially followed by increases whereas low-inflation countries maintained relatively low-inflation upon euro adoption. The study examines disinflation policies of reform versus fiat with the overall conclusion that countries adopting a fiat approach have high long-term costs while reformist countries benefit from flexible markets.

James Barth, John JaheraCo-Editors