Global Markets Institute: Effective Regulation - Part 1: Avoiding Another Meltdown

In the first of two papers on financial-market regulation, we analyze how the market crisis has come about and offer thoughts on how to prevent another. A global savings glut fed the global housing bubble, while securitization reduced the effectiveness of firebreaks in the financial system. At the same time, regulation lowered system-wide capital levels, impeding the ability to manage large shocks. The spread of complex financial holding companies caused further damage. We offer four principles for rebuilding the global financial system: 1) better monitoring of capital flows; 2) changes that will return securitization to its role as a risk-management function, not a means of capital relief; 3) symmetrical recognition of profit and risk in lending; and 4) changes to the treatment of lending linked to investment banking activities.

>> Effective Regulation: Part 1 - Avoiding Another Meltdown [PDF, 499 KB]