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Industry News
One of the biggest problems with Basel III and current banking regulation is that it fails to tackle the regulation of derivatives adequately. Far too little information about derivative contracts is in the hands of the regulators and academics, making it extremely difficult to calculate risk. Countries with large banks and deep pockets, which are also the countries with the strongest moral hazard, are the ones in greatest need of derivative regulation.
Why do we need derivative regulation?
During a crisis, regulators and banks might view the value of bank liquidity differently. For example, while regulators would want banks to be well capitalised during systemic financial crises in order to avoid providing costly bail-outs, banks have different incentives. Banks do not internalise bail-out costs and are much more likely to write derivative contracts that leave them with large liabilities during systemic crises…. [
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Tags: Basel III, Derivative Regulation, Derivatives, Reform & Regulation