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The Future of Banking Levine, Ross, and Sara Zervos (1998) “Stock Markets, Banks, and Economic Growth.” American Economic Review 88: 537-558. About the author Ross Levine is the Harrison S. Kravis University Professor at Brown University. A frequent consultant at the International Monetary Fund and the World Bank, he is an Associate Editor of the Journal of Economic Growth and the Journal of Financial Intermediation. After working at the Board of Governors of the Federal Reserve System for three years, Dr. Levine moved to the World Bank in 1990. There he participated and managed a number of research and operational programs. He received his Ph.D. in economics from UCLA in 1987. 91
Banking is back in the headlines. From desperate efforts by governments to address the Eurozone crisis to the ‘Occupy Wall Street’ movement that is currently spreading across the globe, banks are again at centre stage. This new Vox eBook presents a collection of essays by leading European and US economists that provide solutions to the financial crisis and proposals for medium- to long-term reforms to the regulatory framework in which financial institutions operate. Key proposals include: • European Safe Bonds (ESBies): Critical of Eurobonds, the authors propose an alternative solution in the form of ‘European Safe Bonds’ (ESBies) – securities funded by currently outstanding government debt (up to 60% of GDP) that would constitute a large pool of ‘safe’ assets. The authors argue that ESBies would address both liquidity and solvency problems within the European banking system and, most critically, help to distinguish between the two. • Capital and liquidity requirements – risk weights are crucial: While ringfencing might be part of a sensible regulatory reform, it is not sufficient. Capital requirements with risk weights that are dynamic, counter-cyclical and take into account co-dependence of financial institutions are critical, and one size does not necessarily fit all. Similarly, liquidity requirements have to be adjusted to make them less rigid and pro-cyclical. While banks are currently under-taxed, the currently discussed financial transaction tax would not significantly affect banks’ risk-taking behaviour and might actually increase market volatility; in addition, its revenue potential could also be overestimated. • The need for a stronger European-wide regulatory framework: If the common European market in banking is to be saved – and the authors argue that it should be – then the geographic perimeter of banks has to be matched with a similar geographic perimeter in regulation, which ultimately requires stronger European-level institutions. Centre for Economic Policy Research 77 Bastwick Street, London EC1V 3PZ Tel: +44 (0)20 7183 8801 Fax: +44 (0)20 7183 8820 Email: cepr@cepr.org www.cepr.org
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