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Macro-economic Policy

Privatizing Banking Regulation

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Privatizing Banking Regulation " Bert Ely argues for the privatization of prudential banking regulation. The present system whereby some banks are, in effect, deemed to big to fail has a strong moral hazard element - whereby banks are encouraged to take more risks because of this implicit guarantee. He proposes a system of cross-guarantee deposit insurance. Under this system an individual bank would negotiate a prudential regulatory contract with a syndicate of of guarantors - largely other banks. The syndicate would guarantee against loss of bank deposits. In return the syndicate would receive a negotiated risk-sensitive insurance premium.

 

By Bert Ely , US

Macro Economic Policy Resource.