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Competition and Stability in BankingThe Role of Regulation and Competition Policy$
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Xavier Vives

Print publication date: 2016

Print ISBN-13: 9780691171791

Published to Princeton Scholarship Online: January 2018

DOI: 10.23943/princeton/9780691171791.001.0001

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Fragility in Banking and the Role of Regulation

Fragility in Banking and the Role of Regulation

Chapter:
(p.37) Chapter 3 Fragility in Banking and the Role of Regulation
Source:
Competition and Stability in Banking
Author(s):

Xavier Vives

Publisher:
Princeton University Press
DOI:10.23943/princeton/9780691171791.003.0003

This chapter examines the unique characteristics of banks that make them heavily regulated and subject to public intervention. It first explains the roots of fragility, contagion, and systemic risk in the banking sector before discussing as an example of fragility the development and crisis of shadow banking in the 2007–2009 crisis. It then considers the regulatory response to banking fragility with the establishment of prudential regulation and the safety net, the side effects of regulation, and the reasons behind the regulatory failure in the 2007–2009 crisis, along with the main measures of the regulatory reform that followed, including the emphasis on macroprudential measures. The chapter concludes with an assessment of regulation in emerging and developing economies and the contrast with developed economies.

Keywords:   fragility, contagion, systemic risk, banking sector, shadow banking, financial crisis, prudential regulation, safety net, regulation, regulatory reform

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