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Published in:
A Retrospective on the 2008 Global Financial Crisis Read chapter Read first chapter

2019 | OriginalPaper | Chapter

3. Prudential Regulation and Capital Controls

Author : Michael Dooley

Published in: The 2008 Global Financial Crisis in Retrospect

Publisher: Springer International Publishing

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Abstract

Michael Dooley makes a case for capital controls. He describes how the growth of international capital flows has increased the incentives by banks to choose high-risk strategies by opening the door to an almost infinite supply of leverage. He argues that the main problem with international investors when it comes to financial stability is that there are so many of them. It follows that limiting domestic financial institutions access to foreign investors can be an effective component of prudential regulation. In particular, he makes the case for required reserves on foreign deposits at domestic financial institutions.

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Footnotes
1
Hellmann et al. (2000).
 
2
For Iceland’s experience see Petursson (2018). Several experts have suggested that Iceland should reduce or eliminate this policy, Edwards (2018), Forbes (2018), IMF (2017). In this Chapter we offer an analysis that supports the use of capital controls.
 
3
The World Bank, for example, has frequently pointed out the dangers of reducing the profitability of sound banking. See Caprio and Summers (1996).
 
Literature
Avdiiey, S., Mccauley, R., & Shin, H. S. (2015). Breaking Free of the Triple Coincidence in International Finance (BIS Working Papers No. 524).
Caprio, G., & Summers, L. H. (1996). Finance and Its Reform: Beyond Laissez Faire. In D. Papadimitriou (Ed.), Stability of the Financial System (pp. 400–421). New York: Macmillan.CrossRef
Edwards, S. (2018, June). Monetary Policy in Iceland: An Evaluation. Report Prepared for the Government of Iceland for a Review of Iceland’s Monetary and Exchange Rate Policy.
Forbes, K. J. (2018, June). Macroprudential Policy After the Crisis: Forging a Thor’s Hammer for Financial Stability in Iceland. Report Prepared for the Government of Iceland for a Review of Iceland’s Monetary and Exchange Rate Policy.
Hellmann, T. F., Murdock, K. C., & Stiglitz, J. E. (2000). Liberalization, Moral Hazard in Banking, and Prudential Regulation: Are Capital Requirements Enough? The American Economic Review, 90(1), 147–165.
IMF. (2017). Iceland: (2017) Article IV Consultation-Press Release; Staff Report; and Statement by the Executive Director for Iceland (International Monetary Fund Country Report No. 17/163).
Keeley, M. C. (1990). Deposit Insurance, Risk, and Market Power in Banking. The American Economic Review, 80(5), 1183–1200.
Petursson, T. G. (2018). Post-Crisis Monetary Policy Reform: Learning the Hard Way. This Volume.
Metadata
Title
Prudential Regulation and Capital Controls
Author
Michael Dooley
Copyright Year
2019
Book
The 2008 Global Financial Crisis in Retrospect

Print ISBN: 978-3-030-12394-9

Electronic ISBN: 978-3-030-12395-6

Copyright Year: 2019

DOI
https://doi.org/10.1007/978-3-030-12395-6_3