The Role of Policy and Banking Supervision in the Light of the Credit Crisis

Persaud, Avinash D.

The zeitgeist of finance over the last decade was "marketization": the switch from bank finance to market finance as loans were originated and securitized by banks, rated by agencies and then relocated to investors. A cynic may say that a better description of what went on was regulatory arbitrage. Risks were transferred, on paper at least, from the regulated sector to the unregulated sector. But it is important to recall that bank supervisors in Europe and elsewhere welcomed the marketization of financial risk. They saw it as a way of spreading risks. They saw risks being removed and distributed away from a small number of large and systemically important banks to a large number of investors. The marketization of finance was as much a conspiracy of the Gnomes of Basle as it was of the Gnomes of Zurich. It is part and parcel of the approach to banking embedded in the new Basle accord on credit risk (Basle II).



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Initiative for Policy Dialogue
Initiative for Policy Dialogue
Initiative for Policy Dialogue Working Paper Series
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April 8, 2011