What financial crises teach us: changes in practices and regulation

M. Vincent

Last updated on May 31, 2021

Prudential regulatory reforms since the subprime crisis: what has been done, what remains to be done

The reforms of financial regulation - particularly on the prudential side - since the 2008 crisis - grouped together under the name “Basel III Accords”, concern banks’ requirements in terms of capital, balance sheet leverage, asset quality and liquidity, the implementation of stress tests, exercises and supervisory bodies, bankruptcy resolution and others. Depending on the geographical area, they are called CRR, CRD IV, Dodd-Frank act. We will see what they are and how they have been implemented, and what the future holds in this respect, notably with FRTB, CRR II and CRD V.

Presenting most of the current regulations currently affecting banks, this is probably the most “practical” part as it will directly echo many of the projects that students will be dealing with, in one way or another, during their internship or future job.

Other reforms: accounting, structural, market

A quick overview of other financial reforms - ring-fencing, CMU, IFRS 9… With a closer look at one of them, EMIR, for European Market Infrastructure Regulation. In September 2009, the heads of government meeting at the G20 set the objective of making the clearing and collateralisation mechanism for standard derivatives mandatory. This reform led to the emergence of a well-known player in the futures markets, the clearing house. Still in the process of being implemented, it has changed a lot of things for trading rooms, the way prices are assessed and risks are managed. We will look at some of these implications from a technical perspective.

The actors of financial regulation, and their interactions

This is the most “political science” part of the course, essential to understand how the texts end up: Public authorities, international organisations, and organisations bringing together private actors, in particular banks - BIS, European Commission, EBA and ESMA, national regulators, lobbies and groups such as the AFME or the BBA … Many of these actors have a very recent existence, having been created following the 2008 crisis.

How did we get here?

A bit of history with an overview of the major stages of finance and crises - the great crisis of 1929, and the Glass-Steagall Act of 1933, the deregulation of the Reagan/Thatcher years, the explosion of derivatives since the early 1990s, the Libor scandal. This is an opportunity to look more particularly at the subprime crisis, its causes and consequences: subprimes, CDOs, rating agencies, the fall of Lehman Brothers, the crisis of confidence, bailout plans, the strengthening of financial regulation.

Suggested readings/ bibliography (classified by difficulty/ technicality)