The deficient government regulation of banks, hedge funds and special-purpose entities is one of the most important reasons for the outbreak and spread of the international financial crisis that started in 2007. Liability limitations, as manifest in the low equity requirements established by the regulating authorities, imply the cutting off of potential losses of the banks. This fed the banks’ appetite for risk. Profits were privatised but losses were carried by the taxpayers and creditors, in other words socialised.
The banking system can only gain new stability if the liability principle is given more weight. The prerequisite is considerably stricter equity requirements. Whereas the short-term rescue of the banks from their acute crisis did not require a considerable amount of international harmonisation, for a long-term system of regulation for the banking sector international harmonisation is imperative in order to prevent a creeping competition of laxity. To achieve this, the countries of the world must submit to a Basel III accord that defines the details of banking regulation with regard to minimal standards for the quality of bank products and that strengthens the responsibility of the banks by way of an increase in the regulatory equity requirements.
Relevant Ifo Policy Issues: Financial Market Crisis | German State Banks
Hans-Werner Sinn: Risk Taking, Limited Liability, and the Banking Crisis. Selected Reprints Ifo Institute: Munich 2008 Contents and Downloads
Hans-Werner Sinn, "The New Systems Competition", Yrjö Jahnsson Lectures, Blackwell Publishing: Oxford (2003), (Information and Downloads). see chapter 7 "Limited Liability, Risk-Taking and the Competition of Bank Regulators" (150-177) (Download, reprint version, 2.4 MB).
Hans-Werner Sinn, "Lemon Banks and Bank Regulation", from "The New Systems Competition", Perspektiven der Wirtschaftspolitik 5, 2004, 23-38, here 33-34; (Download, 137 KB). German version: "Der neue Systemwettbewerb", Perspektiven der Wirtschaftspolitik 3, 2002, 391-407; (Download, 154 KB); CESifo Working Paper No. 623, December 2001; NBER Working Paper No. 8747, January 2002.
Hans-Werner Sinn, "Risk Taking, Limited Liability and the Competition of Bank Regulators", Finanzarchiv 59, No. 3, 2003, 305-329; (Download, 4.6 MB); CESifo Working Paper No. 603, 2001; NBER Working Paper No. 8669, 2001.
Ernst Baltensperger, "Competition of Bank Regulators: A More Optimistic View. A Comment on the Paper by Hans-Werner Sinn", Finanzarchiv 59, 2003, 330-335; (Download, 305 KB).
Peter Spencer, "Can National Banking Systems Compete? A Comment on the Paper by Hans-Werner Sinn", Finanzarchiv 59, 2003, 336-339; (Download, 200 KB).
Hans-Werner Sinn, "Asymmetric Information, Bank Failures, and the Rationale for Harmonizing Banking Regulation. A Rejoinder on Comments of Ernst Baltensperger and Peter Spencer", Finanzarchiv 59, 2003, 340-346; (Download, 1.6 MB).
Hans-Werner Sinn, "Risk Taking, Limited Liability and the Competition of Bank Regulators", Finanzarchiv 59, No. 3, 2003, 305-329; (Download, 4.6 MB); CESifo Working Paper No. 603, 2001; NBER Working Paper No. 8669, 2001.; see also chapter 7 "Limited Liability, Risk-Taking and the Competition of Bank Regulators" in "The New Systems Competition", Yrjö Jahnsson Lectures, Blackwell Publishing: Oxford (2003), 150-177 (Download, reprint version, 2.4 MB).
Hans-Werner Sinn, The New Systems Competition, Yrjö Jahnsson Lectures, Basil Blackwell: Oxford 2003, 228 pages. (Content and downloads).
Hans-Werner Sinn, "The Selection Principle and Market Failure in Systems Competition", Journal of Public Economics 66, 1997, 247-274; (Download, 1.28 MB); CESifo Working Paper No. 103, 1996; NBER Working Paper No. 5411, March 1999.
Hans-Werner Sinn, "The Bloos Rule", Economic Decisions under Uncertainty, North Holland: Amsterdam, New York and Oxford 1983, 163-182 (Download, reprint version, 1.65 MB).
Hans-Werner Sinn, "The Theory of Currency Speculation", "Theory of Insurance Demand", Economic Decisions under Uncertainty, North Holland: Amsterdam, New York and Oxford 1983, 275-334 (Download, reprint version, 4.8 MB).
Hans-Werner Sinn, "Kinked Utility and the Demand for Human Wealth and Liability Insurance", European Economic Review 17, 1982, 149-162; (Download, 786 KB).
Tables, charts and reports provided by Ifo's Database for Institutional Comparisons in Europe DICE Additionally to the listed tables you will find information on Bank Regulation and Supervision in a DICE Special. A compilation of bank rescue packages is found in the section Banking.
Capital Requirements I (Table | 29.10.2008 | Details | Download)
Capital Requirements II (Table | 29.10.2008 | Details | Download)
Disciplining Devises I (Table | 29.10.2008 | Details | Download)
Disciplining Devises II (Table | 29.10.2008 | Details | Download)
Disciplining Devises III (Table | 30.10.2008 | Details | Download)
Supervision: Basel II (Archived Table | 29.10.2008 | Details | Download)
Supervision: Legal Status of Supervisory Authority I (Table | 30.10.2008 | Details | Download)
Supervision: Legal Status of Supervisory Authority II (Table | 30.10.2008 | Details | Download)
Supervision: Supervisory Authority I (Table | 29.10.2008 | Details | Download)
Supervision: Supervisory Authority II (Table | 29.10.2008 | Details | Download)
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