The Fundamental Principles of Financial Regulation

Geneva Reports on the World Economy 11 International Center for Monetary and Banking Studies (ICMB)

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FP?K7ª645*-*6224--6*4*/ The Fundamental Principles of Financial Regulation

Geneva Reports on the World Economy 11

Markus Brunnermeier Princeton University and CEPR

Andrew Crockett JPMorgan Chase

Charles Goodhart London School of Economics

Avinash D. Persaud Intelligence Capital Limited

Hyun Song Shin Princeton University and CEPR

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ICMB INTERNATIONAL CENTER FOR MONETARY AND BANKING STUDIES

CIMB CENTRE INTERNATIONAL D’ETUDES MONETAIRES ET BANCAIRES International Center for Monetary and Banking Studies (ICMB)

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Obcbobk`bp .-5 List of Tables Q^_ibª. E^fo`rqpªlkªobmlª^dobbjbkqp /.

List of Figures Cfdrobª. Qebªobi^qflkpefmª_bqtbbkªòbafqªo^qfkdpª^kaª`^mfqîª âbnr^`vªobnrfobjbkqp 6 Cfdrobª/ >kªbu^jmibªlcªfkqbo_^khªobi^qflkpefmp .2 Cfdrobª0 Qebª]aljfkl$ªjlabiªlcªcfk^k`fîª`lkq^dflk .3 Cfdrobª1 Qebªilppªpmfoîª%_î^k`bªpebbqªpmfoî& .4 Cfdrobª2 Qtlªifnrfafqvªpmfoîp .5 Cfdrobª3 Ibsbo^dbªdoltqeª^kaª^ppbqªdoltqeªlcªRPªfksbpqjbkqª_^khp .6 Cfdrobª4 KloqebokªOl`h$pªibsbo^db)ªGrkbª.665ªåªAb`bj_boª/--4 06

List of Boxes ?luª. J^oh*ql*crkafkd7ª^kªbumlpfqflk 10

ix List of Conference Participants

Bajlkaª>ime^ka¤ov @e^foj^kªlcªqebª?lôa)ª @KMª>ppro^k`bp)ªMôfpª Psbfkª>kaobpbkª PbòbqôvªDbkboî) Cfk^k`fîªPq^_fifqvªClorj)ª?^pbiª Ofèôaª>mlpqlifh Mobpfabkqªª#ª@BL)ª Dil_îª>ppl`f^qflkªlcªOfphªMolcbppflkîp)ªIlkalkª Ibpwbhª?î`boltf`w Molcbpplo)ª Tôp^tªPèlliªlcªB`lkljf`p)ªTôp^tª Ofèôaª?îatfkª Molcbpplo) QebªDoâr^qbªFkpqfqrqbªlcªFkqbok^qflkîª^ka AbsbilmjbkqªPqrafbp)ªDbkbs^ª Sfqª?ôq^ª >asfpboªqlªqebªSf`bªDlsboklo) @wbèªK^qflkîª?^kh)ªMo^drbª Bof`ª?ôqeîlkª Bub`rqfsbªAfob`qlo,EbâªlcªQ>>ª#ª@^mfqîªJôhbqp) >iif^kwªFksbpqjbkqªJ^k^dbjbkq*>iif^kwªPB) Jrkfèª O¤jvª?bopfboª @BLªMofs^qbª?^khfkd)ªEbâªlcªCobkèªpmb^hfkd jôhbqp) ?^khªGrifrpª?◊o)ªDbkbs^ª Ol_boqª?fèpbiª AbmrqvªEbâ)ªCfk^k`fîªPq^_fifqvªRkfq) PtfppªK^qflkîª?^kh)ªWÎofèª Kfhi^rpª?i^qqkboª Bjbofqrpªmolcbpploªlcªb`lkljf`p) Rkfsbopfqvªlcª?^pbi)ª?^pbiª GÎodª?irjª AbmrqvªEbâªlcªCfk^k`fîªPq^_fifqv) PtfppªK^qflkîª?^kh)ª?bokª I^robk`bª?llkbª @efbcªB`lkljfpqª%Co^k`b&)ª ?ôì^vpª@^mfqî)ªMôfpª @i^raflª?loflª EbâªlcªObpbôèª^kaªMlif`vª>kîvpfp) ?^khªcloªFkqbok^qflkîªPbqqibjbkqp)ª?^pbiª Jôhrpª?orkkbojbfboª BatôapªP+ªP^kcloaªMolcbpploªlcªB`lkljf`p) Mofk`bqlkªRkfsbopfqv)ªMofk`bqlkª Jôhª@ôbvª >asfpboªFkqbok^qflkîªCfk^k`b)

x List of Conference Participants xi

CbaboîªObpbosbª?lôa)ªT^pefkdqlkªA@ª Pqbmebkª@b`èbqqfª B`lkljf`ª>asfpboª^kaªEbâªlcªqebªJlkbqô vª^ka B`lkljf`ªAbmôqjbkq) ?^khªcloªFkqbok^qflkîªPbqqibjbkqp)ª?^pbiª ?bklfqª@lbro¤ª EbâªlcªJriqfi^qboîª^kaªAbsbilmjbkqª>cc^fop) JfkfpqovªlcªCfk^k`b)ªMôfpª Gb^k*MfboobªA^kqefkbª Molcbpplo) RkfsbopfqvªlcªI^rp^kkbª J^k^dfkdªAfob`qlo)ª PtfppªCfk^k`bªFkpqfqrqb)ªI^rp^kkbª MfboobªAôfboª Môqkbo) Ilj_ôaªLafboªAôfboªEbkqpèª#ª@fb)ªDbkbs^ª Glp¤ªAbªDo¤dloflª Dlsboklo) @bkqoîª?^khªlcª@efib)ªP^kqf^dlª G^`nrbpªAbimi^ªª Jbj_bo) @lrk`fiªlcª>asfpbopªqlªqebªMofjbªJfkfpqbo )ªMôfpª M^riªAbj_fkphfª Afob`qlo) L_pbos^qlfobªabªi^ªCfk^k`b)ªDbkbs^ª DlacofbaªAbªSfaqpª Afob`qloªlcªBrolmb^kª>cc^fop) F@>)ªIlkalkª @eofpqf^kªAlkwbª J^k^dfkdªAfob`qlo,EbâªlcªPlrqebokªBrolmb) Abrqpèbª?^kh)ªDbkbs^ª Jô`ªCi^kaob^rª Molcbpplo) QebªDoâr^qbªFkpqfqrqb)ªDbkbs^ª M^lilªDôlkk^ª AbmrqvªBub`rqfsbªPbòbqôv) RKªB`lkljf`ª@ljjfppflkªcloªBrolmb)ªDbkbs^ª Pqbc^kªDboi^èª MolcbpploªlcªJlkbqôvªB`lkljf`p)ª FkpqfqrqbªcloªJlkbqôvª^kaªCfk^k`fîªPq^_fifqv) DlbqebªRkfsbopfqvªlcªCo^khcroq)ªCo^khcroqª JfèbiªDfoôafkª Jbj_boªlcªPbkfloªJ^k^dbjbkq) Rkflkª?^k`^fobªMofs¤b)ªDbkbs^ª @eôibpªDllaeôqª Kloj^kªPlpkltªMolcbpploªlcª?^khfkdª^kaªCfk^k`b) IlkalkªPèlliªlcªB`lkljf`p)ªIlkalkª A^sfaªDobbkª >asfploªlcªFkqbok^qflkîª>cc^fop) Cfk^k`fîªObmloqfkdª@lrk`fi)ªIlkalkª A^kfbiªEbiiboª Afob`qloªlcªCfk^k`fîªPvpqbjp) PtfppªK^qflkîª?^kh)ª?bokª >kkbªE¤ofqfboªI^è^qª Jbj_boªlcªqebª?lôa) CFKJ>)ªPtfppªCfk^k`fîªJôhbqpªPrmbo sfplov >rqelofqv)ªDbkbs^ª OfèôaªEboofkdªª G^`l_ªP^co^ªMolcbpploªlcªFkqbok^qflkîª?^khfkdª^ka MolcbpploªlcªCfk^k`b) QebªTeôqlkªPèlli)ªRkfsbopfqvªlcªMbkkpvis^kf^) xii The Fundamental Principles of Financial Regulation

Mefiâbimef^ª MefifmmªEfiab_o^kaª Sf`b*@e^foj^kªlcªqebªDlsbokfkdª?lôa) PtfppªK^qflkîª?^kh)ª?bokª Pfoª@eofpqlmeboªElddª @e^foj^k) Cfk^k`fîªObmloqfkdª@lrk`fi)ªIlkalkª Pqbc^kªFkdsbpª Dlsboklo) PsbofdbpªOfhp_^kh)ªPql`helijª KfdbiªGbkhfkplkª >asfpboªDlsboklopª#ªPbòbqôfbp) ?^khªlcªBkdi^ka)ªIlkalkª J^krbiªGbqwboª J^k^dfkdªAfob`qlo) @obafqªPrfppb)ªDbkbs^ª Hbopqfkª^cªGlèkf`hª @e^foª@B?P) @ljjfqqbª^cªBrolmb^kª?^khfkdªPrmbo sfplop) Pql`helijª Qelj^pªGloa^kª Jbj_boªlcªqebªDlsbokfkdª?lôa) PtfppªK^qflkîª?^kh)ªWÎofèª BatôaªH^kbª G^jbpªC+ª@ibôvªMolcbpploªfkªCfk^k`b) ?lpqlkª@liibdb)ª?lpqlkª MfboobªHbiiboª ClojboªPbkfloªMôqkbo) Ilj_ôaªLafboªAôfboªEbkqpèª#ª@fb)ªDbkbs^ª RiofèªHleifª >iqbok^qbªJbj_boªlcªqebªDlsbokfkdª?lôa) PtfppªK^qflkîª?^kh)ªWÎofèª Gb^k*MfboobªI^ka^rª AbmrqvªDlsboklo) ?^knrbªabªCo^k`b)ªMôfpª A^sfaªIlkdtloqeª AbmrqvªDlsboklo) ?^khªlcª@^kâ^)ªLqq^t^ª EbkofªIlr_bod¤ª MolcbpploªlcªB`lkljf`p) RkfsbopfqvªlcªDbkbs^)ªDbkbs^ª Pq^kªJ^bpª Jbj_boªlcªQebª@efbcªB`lkljfpqªQb^j) Brolmb^kª@ljjfppflk)ª?orppbipª PvisfbªJ^qebo^qª Afob`qloªCfk^k`fîªPq^_fifqv) ?^knrbªabªCo^k`b)ªMôfpª J^rof`bªJlk_ôlkª Sf`bª@e^foj^kªlcªqebª?lôaªlcªAfob`qlop) @o¤afqª>dof`libª%Prfppb&ªP>)ªDbkbs^ª Glk^pªKfbjbvboª EbâªlcªMlif`vª^kaª>kîvpfpªAfsfpflk) PsbofdbpªOfhp_^kh)ªPql`helijª GlekªKrdbbª J^k^dfkdªAfob`qlo)ªLccf`fîªFkpqfqrqflkpªDolrm) Pq^qbªPqobbqªDil_îª>asfplop)ªIlkalkª A^kffiibªKlrvª PbòbqôvªDbkboî) @ljjfppflkª?^k`^fob)ªMôfpª RdlªM^kfww^ª Rkfqª@efbcªAb_qª^kaªCfk^k`bª>kîvpfp) RK@Q>A)ªDbkbs^ª List of Conference Participants xiii

Ir`^pªM^mâbjlpª Sf`bªMobpfabkq) Brolmb^kª@bkqoîª?^kh)ªCo^khcroqª >sfk^peªMbop^raª @e^foj^k) Fkqbiifdbk`bª@^mfqîªIfjfqbaª#ªFksbpqjbkq)ªIlkalkª JfèbiªMbvqofdkbqª Ebâ)ªB`lkljf`ª>cc^fop) PtfppªK^qflkîª?^kh)ªWÎofèª Gb^kªMfp^kf*Cboovª Afob`qlo) ?orbdbi)ª?orppbipª OfèôaªMloqbpª Mobpfabkq) @bkqboªcloªB`lkljf`ªMlif`vªObpbôè)ªIlkalk MolcbpploªlcªB`lkljf`p) Ilkalkª?rpfkbppªPèlli)ªIlkalk Eboj^kkªObjpmbodboª Jbj_boªlcªqebªBub`rqfsbª?lôa) Abrqpèbª?rkabp_^kh)ªCo^khcroqª O^c^biªObmriilª MolcbpploªlcªB`lkljf`p) @BJCF)ªJâofaª Ol_boqªOblèª Afob`qlo) Kbtª@liibdbª@^mfqîªIqa)ªIlkalkª ?boqo^kaªOfjbª EbâªlcªCfk^k`fîªPq^_fifqv) PtfppªK^qflkîª?^kh)ª?bokª >i^fkªOl_boqª EbâªTbîqeªJ^k^dbjbkqª#ª?rpfkbppª?^khfkd Ptfqwboi^ka) R?Pª>D)ªWÎofèª J◊oqbkªOlppª AbmrqvªDlsbokloª^kaªJbj_boªlcªqebªBub`rqfsb ?lôa) ?^khªlcªBpqlkf^)ªQîifkkª Pîs^qlobªOlppfª J^k^dfkdªAfob`qlo)ªB`lkljf`ªObpbôèª^ka Fkqbok^qflkîªObi^qflkp) ?^k`^ªa$Fqîf^)ªOljbª @i^raflªPbdo¤ª @e^foj^k)ª>odrpªcrka) PBCFªP>)ªDbkbs^ª AfohªPèlbkj^hboª Molcbpplo) CobbªRkfsbopfqvªlcª>jpqboa^j)ª>jpqboa^jª Ol_boqªPebi_rokbª @efbcªB`lkljfpq) RKªB`lkljf`ª@ljjfppflkªcloªBrolmb)ªDbkbs^ª EvrkªPefkª MolcbpploªlcªB`lkljf`p) Mofk`bqlkªRkfsbopfqv)ªMofk`bqlkª Co^khªPjbqpª J^k^dfkdªAfob`qloªåªObpbôè) Brolmb^kª@bkqoîª?^kh)ªCo^khcroqª A^sfaªPqo^è^kª Afob`qloªCfk^k`fîªPq^_fifqvªAfsfpflk) Cfk^k`fîªPbosf`bpª>rqelofqv)ªIlkalkª >ibu^kaboªPtl_la^ª Molcbpplo)ªFkqbok^qflkîªB`lkljf`p) QebªDoâr^qbªFkpqfqrq)ªDbkbs^ª xiv The Fundamental Principles of Financial Regulation

Fpqs^k*MîªPwbhbivª ObpbôèªAfob`qlo)ªADªB`cfk) Brolmb^kª@ljjfppflk)ª?orppbipª @¤aof`ªQfiibª Molcbpplo) QebªDoâr^qbªFkpqfqrqb)ªDbkbs^ª M^riªQr`hboª Bub`rqfsbªAfob`qlo*Jôhbqp) ?^khªlcªBkdi^ka)ªIlkalkª DboqorabªQrjmbi*Drdbobii Jbj_boªlcªqebªBub`rqfsbª?lôa)ª Brolmb^kª@bkqoîª?^kh)ªCo^khcroqª >kdbiªR_fabª Afob`qloªlcªDil_îªB`lkljf`p) QraloªFksbpqjbkqª@lomlo^qflk)ªT^pefkdqlkªA@ª Pfisfk^ªS^qkf`hª Mobpfabkq) @bkqboªcloªCfk^k`fîªPq^_fifqv)ª?rbklpª>fobpª Glp¤ªSf„îpª AbmrqvªDlsboklo) ?^k`lªabªBpm^„^)ªJâofaª Fdk^wflªSfp`lª Jbj_boªlcªqebª?lôaª^kaªAbmrqvªAfob`qloªDbkboî) ?^k`^ªa$Fqîf^)ªOljbª PrpefiªTâet^kfª Afob`qlo) Tâet^kfª>ppbqªJ^k^dbjbkq)ªIlkalkª ?b^qof`bªTbaboªAfªJ^rolª MolcbpploªlcªB`lkljf`p) RkfsbopfqvªlcªJ^fkw Dboj^kª@lrk`fiªlcªB`lkljf`ªBumboqpª ?fiiªTefqbª MobsflrpªB`lkljf`ª>asfpboª^kaªEbâªlcªqeb Jlkbqôvª^kaªB`lkljf`ªAbmôqjbkq) ?^khªcloªFkqbok^qflkîªPbqqibjbkqp)ª?^pbiª PfoªKfdbiªTf`hpª @e^foj^k) Brolìbô)ªIlkalkª Qelj^pªTfbajboª >iqbok^qbªJbj_boªlcªqebªDlsbokfkdª?lôa) AbmôqjbkqªFF)ªPtfppªK^qflkîª?^kh)ª?bokª Glk^qe^kªTfijlqª J^k^dfkdªAfob`qlo)ªDil_îªPqo^qbdv)ªCfubaªFk`ljb Obpbôè) @o¤afqªPrfppb)ªIlkalkª M^tbiªTv`w^kphfª >asfplo)ªCfk^k`fîªPvpqbj) K^qflkîª?^khªlcªMli^ka)ªTôp^tª @eôibpªTvmilpwª Molcbpplo)ªFkqbok^qflkîªB`lkljf`p) QebªDoâr^qbªFkpqfqrqb)ªDbkbs^ Afob`qlo) F@J?)ªDbkbs^ª Acknowledgements

Qebª^rqelopªtfpeªqlªqe^khªSfoîª>èôv^)ªQl_f^pª>aof^k)ªHbokª>ibu^kabo)ªFkd*E^t @ebkd)ªAlrdi^pªAf^jlka)ªGlekªB^qtbii)ªJfè^biªCllq)ªDblccobvªDôafkbo)ªMefifmm Eôqj^kk)ªOfèôaªGlekplk)ª>kfiªH^pev^m)ªGb^k*MfboobªI^ka^r)ªPqbmebkªJloofp) Jôf^ªKfbql)ªGlekªKrdbb)ªJôqfkªLbejhb)ªGlekªM^qqfplk)ªBkof`lªMbolqqf)ªOfèôa Mloqbp)ª?of^kªNrfkk)ªO^dero^jªO^g^k)ªOl_boqªOblè)ªO^c^biªObmriil)ªJôqfk Pèjîw)ª>kfiªPe^ja^p^kf)ªPqbsbªQefbhb)ªGlekªT îpe)ªGlekªT fiif^jplk)ª@eôibp Tvmilpwª^kaªQ^kgrªVlorij^wbo+ >kvªsfbtpªbumobppbaªôbªqelpbªlcªqebª^rqelopª^kaªpelriaªklqª_bªobdôabaª^p qelpbªlcªqebªfkpqfqrqflkpªtfqeªtefèªqebvªôbª^ccfif^qba+

xv Foreword

Qla^vÖpªcfk^k`fîªobdri^qlovªpvpqbjpª^pprjbªqe^qªobdri^qflkpªtefèªj^hbªfkafsfa* rîª_^khpªp^cbªîplªj^hbªqebªcfk^k`fîªpvpqbjªp^cb+ªQebªbibsbkqeª Dbkbs^ Obmloq lk qeb Tloia B`lkljv peltpªqe^qªqefpªqefkhfkdªfpªci^tba+ª>`qflkpªqe^qª_^khpªq^hbªql j^hbªqebjpbisbpªp^cboª`^kªåªfkªqfjbpªlcªòfpfpªåªrkabojfkbªqebªpvpqbjÖpªpq^_fifqv + QebªObmloqªôdrbpªcloª^ªafccbobkqª^mmol^è+ QebªObmloqª_rfiapªlkªfqpªmobab`bpplo)ªqebªkfkqeªDbkbs^ Obmloq)ªtefèªbu^jfkba qebªj^fkªqeob^qpªqlªcfk^k`fîªpq^_fifqvªfkªqebªdil_îªb`lkljv +ªQebªfkfqfîªsbopflk lcªqebªkfkqeªObmloqªt^pªmobpbkqbaª^qª^ª`lkcbobk`bªfkªJ^vª/--4)ª_bclobªqebªòfpfp eâªbjbodba+ªQebªObmloqÖpª^rqelopªtbobªcôªcoljªp^kdrfkbªbsbkªqebk)ª^kaªqebªafp* `rppflkpª^qªqebª`lkcbobk`bªcl`rpbaªlkªqebªc^riqªifkbpªfkªqebªdil_îªcfk^k`fîªpvp * qbj+ªQebªObmloqªt^pªmr_ifpebaªfkªKlsbj_boª/--4)ªtebkªqebpbªc^riqªifkbpªeâ _b`ljbª^mmôbkqª^kaªqrojlfiªfkªcfk^k`fîªjôhbqpªeâªîobâvªì^fjbaªfqpªcfopqªsf`* qfj)ªKloqebokªOl`h+ª Fkªqebªvbôªqe^qªcliiltba)ªcfopqªdil_îªcfk^k`fîªjôhbqpª^kaªqebkªqebªdil_î b`lkljvªabqboflo^qba)ª^qªcfopqªdoârîiv )ª^kaªqebkªtfqeªîôjfkdªpmbba+ª?vªi^qb /--5ªfqªt^pª^mmôbkqªqe^qªqebªmlif`vªmobpòfmqflkpªfkªqebªkfkqeªObmloqªafaªklqªdl kbôivªcôªbklrde)ªdfsbkªqebªpbsbofqvªlcªqebªmol_ibjpªc^`fkdªmlif`v*j^hbop+ªF@J? qebobclobª_olrdeqªclotôaªqebªbibsbkqeªObmloq)ªtefèªt^pªmobpbkqbaª^qª^ª`lkcbo * bk`bªfkªG^krô vª/--6ª^kaªt^pªtfabivª`fo `ri^qbaªfkªao^cqªclojª^qªqe^qªqfjb+ªQeb Obmloqªalbpªfkabba)ª^pªelmba)ªâaobppªqebªcrka^jbkqîªfpprbpªqe^qªifbª^qªqebªebôq lcªqebªafccf`riqfbpªc^`fkdªqebªdil_îªcfk^k`fîªpvpqbjª^kaªfqpªobdri^qlop+ª >pªJbosvkªHfkdªe^pªofdeqivªp^fa)ª]Qebª`lpqpªlcªqefpªòfpfpªôbªklqªqlª_bªjb^proba pfjmivªfkªqbojpªlcªfqpªfjm^`qªlkªmr_if`ªcfk^k`bp)ªqebªabpqor`qflkªlcªtbîqeª^kaªqeb krj_boªlcªgl_pªilpq+ªQebvªôbªîplªqlª_bªpbbkªfkªqebªilpqªqorpqªfkªqebªcfk^k`fîªpb` * qloª^jlkdªlqeboªmôqpªlcªlroªb`lkljvªñ$ªF@J?ª^kaª@BMOªôbªabifdeqbaªqlªmol * sfabª^ªclorjªcloªqebª^rqelopªqlªmrqªclo tôaªqefpª`ôbcriª^kîvpfpªlcªcfk^k`fîªobdr* i^qflk+ªQebªjb^probpªqebvªmolmlpb)ª_vªfjmolsfkdªqebªcrk`qflkfkdªlcªdil_îªcfk^k * `fîªjôhbqp)ªtlriaªdlªpljbªt^vªqltôaªobpqlofkdªqefpªqorpq+

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xvi Executive Summary

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Systemic risks

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Risk and the economic cycle

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Micro and macro-prudential regulation

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>qªqebª`bkqobªlcªqefpªDbkbs^ªObmloqªfpªqebªmolmlpîªqlªj^hbª`^mfqîªobnrfob * jbkqpª`lrkqbo*`vìf`î+ªFkªmo^`qf`îªqbojpªtbªob`ljjbkaªobdri^qlopªfkòb^pbªqeb bufpqfkdª`^mfqîªâbnr^`vªobnrfobjbkqpª%_^pbaªlkª^kª^ppbppjbkqªlcªfkebobkqªofphp& _vªlkb)ªloªmboe^mpªqtl)ªjriqfmibp+ªT bªt^kqªqlªfkqbo^`qªj^òl*morabkqfîªtfqe jfòl*morabkqfîªobdri^qflkpª%bppbkqfîivª?^pbiªFF&ªcloªqtlªj^fkªob^plkp)ªo^qebo qe^kª^_^kalkfkdª?^pbiªFFªîqldbqebo +ªCfopq)ªjfòl*morabkfqîªobdri^qflkªobj^fkp sîfaª^kaªkb`bppôv8ªfqªfpªgrpqªfkprccf`fbkqªlkªfqpªltk+ªPb`lka)ªfqªfpªb^pfboªqlªj^kfm* ri^qbª%qlªÖd^jbÖ&ªb^èªfkafsfarîªobdri^qflkªlkªfqpªltk)ªqe^kªtebkªqebvªtloh qldbqebo+ Qebªcfopqªjriqfmifboªfpªobi^qbaªqlª^_lsbª^sbo^dbªdoltqeªlcªòbafqªbum^kpflkª^ka qlªibsbo^db+ªObdri^qlopª^kaª`bkqoîª_^khbopªpelriaª^dobbªlkªqebªabdobbªlcª_^kh ^ppbqªdoltqeª^kaªibsbo^dbªqe^qªfpª`lkpfpqbkqªtfqeªqebªilkd*orkªqôdbqªcloªkljfkî DAM+ªQebªjriqfmibªlkª`^mfqîªèôdbpªofpbpªqebªjlobªòbafqªbum^kpflkªbu`bbapªqefp qôdbq+ªQebªmromlpbªlcªqefpª`^mfqîªèôdbªfpªklqªqlªbifjfk^qbªqebªb`lkljf`ª`vìb) pljbqefkdªtefèªtlriaªobnrfobªrpªqlªe^sbª^kª^_fifqvªqlªclob`^pqªqebª`vìbª_bqqbo qe^kªtbª`^k)ª_rqªqlªib^kª^d^fkpqªqebªtfkaª^kaªbkprobªqe^qª_^khpªôbªmrqqfkdª^pfab ^kªfkòb^pfkdª^jlrkqªlcª`^mfqîªfkª^kªrm*`vìbªtebkª`roobkqivª^s^fi^_ibªofphªjb^p* robpªtlriaªprddbpqªqe^qªqebvª`^kªp^cbivªibsbo^dbªjlob+ªQefpªbuqo^ª`^mfqîª`^kªqebk _bªobib^pbaªtebkªqebª_lljªbkapª^kaª^ppbqªmof`bpªcîiª_^`h+ªQebª`lrkqbo*`vìf`î èôdbªpelriaªpbosbªqlªjlabo^qbªqebª_llj*_rpqª`vìb+ª Qebªpb`lkaªjriqfmibªlkª`^mfqîªèôdbpª`lriaª_bªobi^qbaªqlªqebªjfpj^qèªfkªqeb j^qrofqvªlcª^ppbqpª^kaªif^_fifqfbp+ª>iqbok^qfsbivªqebª@bkqoîª?^khª`lriaªibsvª^ªsôv* fkdªmobjfrjªcloªfkprofkdª^d^fkpqªifnrfafqvªofph)ª^d^fkªobi^qbaªqlªjfpj^qè+ªLkbªlc qebªj^fkªibpplkpªlcªqebª@o^peªlcª/--4,5ªfpªqe^qªqebªofphªlcª^kª^ppbqªfpªpr_pq^kqfîiv fkcirbk`baª_vªqebªj^qrofqvªlcªfqpªcrkafkd+ªKloqebokªOl`hª^kaªlqeboª`^prîqfbpªlc qebªò^peªjfdeqªtbiiªe^sbªprosfsbaªtfqeªqebªp^jbª^ppbqpªfcªqebª^sbo^dbªj^qrofqvªlc qebfoªcrkafkdªeâª_bbkªilkdbo +ªFcªobdri^qlopªj^hbªifqqibªafpqfk`qflkªlkªeltª^ppbqp ôbªcrkaba)ªcfk^k`fîªfkpqfqrqflkpªtfiiªobivªlkªèb^mbo )ªpeloq*qbojªcrkafkd)ªtefè fkòb^pbpªpvpqbjf`ªco^dfifqv+ªQefpª`^kª_bªlcc*pbqªqeolrdeªqebªfjmlpfqflkªlcª^ª`^mfqî èôdb)ªloªmobjfrj)ªqe^qªfpªfksbopbivªobi^qbaªqlªqebªj^qrofqvªlcªcrkafkdªlcªprè ^ppbqpª^pª`^kklqªklojîivª_bªmlpqbaª^qªqebª`bkqoîª_^khªcloªifnrfafqv +ª Qlªcroqeboªobar`bªqebªpmfoîªlcªpîbpªfkª^ªòfpfpª^kaªqlªprmmloqªcfk^k`fîªfkpqfqr * qflkpªfkªibkdqebkfkdªqebªj^qrofqvªlcªqebfoªcrkafkd)ªtbªîplªmolmlpbªqe^qªfkpqbâ lcªprpmbkafkdªjôh*ql*jôhbqªsîrbª^``lrkqfkd)ªcfk^k`fîªfkpqfqrqflkpª`lriaª`lj* mibjbkqªjôh*ql*jôhbqª^``lrkqfkdªtfqeªjôh*ql*crkafkdªsîr^qflkp)ªtefè tlriaª_bªjlobª^mmolmof^qbªcloª^ppbppfkdªofphª^kaª`^mfqîªâbnr^`v +ª

Not all financial institutions are alike

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Global arrangements for global banks

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1 Analytical Background

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13 14 The Fundamental Principles of Financial Regulation

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2.2 Funding liquidity and the domino model

Fqªfpª^ªqorfpjªqe^qªbkprofkdªqebªplrkakbppªlcªb^èªfkafsfarîªfkpqfqrqflkªbkprobp qebªplrkakbppªlcªqebªpvpqbjª^pª^ªtelib+ªEltbsbo)ªcloªqefpªmolmlpfqflkªqlª_bª^ªdlla mobpòfmqfsbªdrfabªcloª^`qflkp)ªtbªkbbaªqlªe^sbª`lkcfabk`bªqe^qª^`qflkpªqe^q bke^k`bªqebªplrkakbppªlcª^ªmôqf`riôªfkpqfqrqflkªtfiiªfksôf^_ivªmoljlqbªlsboîi pq^_fifqv+ªEltbsbo)ªqebªmolmlpfqflkªfpªsrikbo^_ibªqlªqebªcîi^`vªlcª`ljmlpfqflk+ .2 Fq fpªmlppf_ib)ªfkabbaªlcqbkªifhbiv)ªqe^qª^qqbjmqpª_vªfkafsfarîªfkpqfqrqflkpªqlªobj^fk plisbkqª`^kªmrpeªqebªpvpqbjªfkqlª`lii^mpb+ª Q^hbª^ªpfjmibªbu^jmib)ªfiirpqo^qbaª_vªCfdrobª/+ª?^khª.ªe^pª_looltbaªcoljª?^kh /+ª?^khª/ªe^pªlqeboª^ppbqp)ª^pªtbiiª^pªfqpªil^kpªqlª?^khª.+ªPrmmlpbªqe^qª?^khª/ªprc * cbopªòbafqªilppbpªlkªqebpbªlqeboªil^kp)ª_rqªqe^qªqebªòbafqtloqefkbppªlcª?^khª. obj^fkpªrkè^kdba+ªQebªilppªprccbobaª_vª?^khª/ªabmibqbpªfqpªbnrfqvª`^mfqî+ªFkªqeb c^`bªlcªprèª^ªpel`h)ª^ªmorabkqª`lropbªlcª^`qflkª_vª?^khª/ªfpªqlªobar`bªfqpªlsboîi bumlprob)ªplªqe^qªfqpª^ppbqª_llhªfpªqofjjbaªqlª^ªpfwbªqe^qª`^kª_bª`ôofbaª`ljcloq * ^_ivªtfqeªqebªpjîiboªbnrfqvª`^mfqî+ª Figure 2 An example of interbank relationships A L A L claim

obligation

Bank 1 Bank 2 Lkbªt^vªqlªbkprobªqebªplisbk`vªlcª?^khª/ªfpªcloªfqªqlªobar`bªfqpªlsboîiªibkafkd) fkìrafkdªfqpªibkafkdªqlª?^khª.+ª?vªobar`fkdªfqpªibkafkd)ª?^khª/ªobar`bpªfqpªofph bumlprob+ªEltbsbo)ªcoljª?^khª.Öpªmbopmb`qfsb)ªqebªobar`qflkªlcªibkafkdª_vª?^khª/ fpª^ªtfqeao^tîªlcªcrkafkd+ªRkibppª?^khª.ª`^kªcfkaªîqbok^qfsbªplro`bpªlcªcrkafkd) fqªtfiiªe^sbªqlªobar`bªfqpªltkª^ppbqªeliafkdp)ªbfqeboª_vª`roq^fifkdªfqpªibkafkd)ªloª_v pbiifkdªjôhbq^_ibª^ppbqp+ Fkªqebª`^pbªtebobªtbªe^sbªqebª`lj_fk^qflkªlcª%f&ª?^khª.ªklqªe^sfkdªîqbok^qfsb plro`bpªlcªcrkafkd)ª%ff&ªqebªobar`qflkªfkª?^khª/Öpªibkafkdª_bfkdªpbsbob)ª^kaª%fff& ?^khª.Öpª^ppbqpª_bfkdªplªfiifnrfaªqe^qªqebvª`^kªlkivª_bªpliaª^qªcfobªpîbªmof`bp)ªqebk

.2 Pbbª@ol`hbqqª%/---&ª"JôovfkdªqebªJfòl*ª^kaªJ^òl*MorabkqfîªAfjbkpflkpªlcªCfk^k`fîªPq^_fifqv" ?^khªcloªFkqbok^qflkîªPbqqibjbkqpªafp`rppflkªm^mbo+ª>ªcîi^`vªlcª`ljmlpfqflkªôfpbpªtebkªlkbªfkcbop qe^qªpljbqefkdªfpªqorbªcloªqebªtelibªcoljªqebªc^`qªqe^qªfqªfpªqorbªcloªb^èªlcªqebªfkafsfarîª`ljml * kbkqpªlcªqebªtelib+ªªPbbªJloofpª^kaªPefkª%/--5&ª"Cfk^k`fîªObdri^qflkªfkª^ªPvpqbjª@lkqbuq"ªcloqe * `ljfkdªfkªqebª?ollhfkdpªM^mbopªlkªB`lkljf`ª>`qfsfqv + 16 The Fundamental Principles of Financial Regulation

Figure 3 The ‘domino’ model of financial contagion

A L A L A L claim claim claim

Bank A Bank B Bank C qebªtfqeao^tîªlcªibkafkdª_vª?^khª/ªtfiiªcbbiªifhbª^ªorkªcoljªqebªmlfkqªlcªsfbtªlc ?^khª.+ªFkªlqeboªtloap)ª^ªmorabkqªpebaafkdªlcªbumlprobpªcoljªqebªmlfkqªlcªsfbt lcª?^khª/ªfpª^ªorkªcoljªqebªmlfkqªlcªsfbtªlcª?^khª.+ª>odr^_iv )ªqefpªqvmbªlcªorkªfp te^qªe^mmbkbaªqlªqebªRHª_^khªKloqebokªOl`h)ªtefèªc^fibaªfkª/--4)ª^pªtbiiª^p qebªRPªpb`rofqfbpªelrpbpª?bôªPqbôkpª^kaªIbej^kª?olqebop)ª_lqeªlcªtefèªprccboba òfmmifkdªorkpªfkª/--5+ Qebªfjmloq^k`bªlcªqebªif^_fifqfbpªpfabªmbopmb`qfsbªmrqpªfkqlªnrbpqflkªqebªqoâf * qflkîªsfbtªlcªeltªpvpqbjf`ªofphªmolm^d^qbpªqeolrdelrqªqebªcfk^k`fîªpvpqbj+ª> k^fsbªsbopflkªlcªprèª^ªsfbtª`lriaª_bªabmf`qbaªfkªCfdrobª0+ Ebob)ª_^khª>ªe^pª_looltbaªcoljª_^khª?)ª^kaª_^khª?ªe^pª_looltbaªcoljª_^kh @)ªbq`+ªQebk)ªfcª>ªq^hbpª^ªefqª^kaªabc^riqp)ªqebkª_^khª?ªtfiiªprccboª^ªilpp+ªFcªqebªilpp fpªiôdbªbklrdeªqlªtfmbªlrqª?Öpª`^mfqî)ªqebkª?ªabc^riqp+ª?^khª@ªqebkªq^hbpª^ªefq+ªFk qrok)ªfcªqebªilppªfpª_fdªbklrde)ª_^khª@ªabc^riqp)ªbq`+ªT bª`lriaªar_ªqefpªqebª]aljf * kl$ªjlabiªlcªcfk^k`fîª`lkq^dflk+ Qebªaljfklªjlabiªlcª`lkq^dflkªe^pª_bbkªbu^jfkbaªfkªkrjbolrpªpfjri^qflk pqrafbpª`lkar`qbaª^qª`bkqoîª_^khp)ª_rqªqebªrkfsbopîª`lkìrpflkªe^pª_bbkªqe^qªqeb fjm^`qªlcªqebªaljfklªjlabiªlcª`lkq^dflkªfpªsbo vªpjîi+ªFqªfpªlkivªtfqeªfjmi^rpf * _ivªiôdbªpel`hpªqe^qªqebªpfjri^qflkpªdbkbo^qbª^kvªjb^kfkdcriª`lkq^dflk+ªQebªob^* plkªfpªqe^qªqebªaljfklªjlabiªm^fkqpª^ªmf`qrobªlcªm^ppfsbªcfk^k`fîªfkpqfqrqflkpªtel pq^kaª_vª^kaªalªklqefkdª^pªqebªpbnrbk`bªlcªabc^riqpªrkcliap+ªFkªmo^`qf`b)ªeltbs * bo)ªqebvªtfiiªq^hbª^`qflkpªfkªob^`qflkªqlªrkcliafkdªbsbkqp)ª^kaªfkª^kqf`fm^qflkªlc fjmbkafkdªabc^riqp+ª

2.3 Loss spiral – asset price effect

Qerp)ªqebªaljfklªjlabiªalbpªklqªq^hbªprccf`fbkqª^``lrkqªlcªeltªmof`bpª^kaªjb^p* robaªofphpªè^kdb)ª^kaªeltªprèªè^kdbpªfjm^`qªlkªqebª_be^sflroªlcªjôhbqªmô * qf`fm^kqp+ªFkªqebªpfjmibpqªp`bkôflªlcªqebªaljfklªjlabi)ª^ppbqªmof`bpªôbªcfubaª^q qebfoª_llhªsîrbp)ª^kaª_î^k`bªpebbqpªq^hbª^ªefqªlkivªtfqeªabc^riq+ªPrèª^ªsfbtªfp l_plibqbªfkªqebªjôhbq*_^pbaªcfk^k`fîªpvpqbjªtebobª_î^k`bªpebbqpªôbªjôhbaªql jôhbqª^kaªtebobªcfk^k`fîªfkpqfqrqflkpªob^`qªqlªè^kdbpªfkªjb^probaªofphp+ª Fkabba)ªabc^riqpªkbbaªklqªbsbkª_bª kb`bppôv qlªdbkbo^qbª`lkq^dflk+ªMof`b è^kdbpªqebjpbisbpªj^vª_bªbklrde+ªTebkªcfk^k`fîªfkpqfqrqflkpªjôhªqebfoª_î * ^k`bªpebbqpªqlªjôhbq)ªè^kdbpªfkªmof`bpªibâªqlªilppbpªqe^qªj^vª_bªprccf`fbkqªql qo^kpjfqªqebªpel`hpªqlªlqeboªfkpqfqrqflkpªbsbkªtebkªqebvªalªklqªeliaªì^fjp ^d^fkpqªb^èªlqebo +ªIlppbpªtlopbkªcrkafkdªifnrfafqvªcloªj^kvªcfk^k`fîªfkpqfqr * qflkp)ªclo`fkdªqebjªqlªpebaªbsbkªjlobª^ppbqpªtefèªcroqeboªabmobppbpªmof`bpª^ka Nature of Systemic Risk 17

Figure 4 The loss spiral (balance sheet spiral)

Adjust leverage Adjust leverage

Stronger Weaker Increase balance sheets balance sheets Reduce B/S size B/S size

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.3 CP>ªDrfa^k`bªKlqbª1ª%/--/&)ª"Obpfifbk`bªqbpqªcloªfkprobop"+ªPbbªîplªCP>ªMobppªObib^pb)ªGrkbª/5qe /--/)ªklªCP>,MK,-4.,/--/)ª"CP>ªfkqolar`bpªkbtªbibjbkqªqlªifcbªfkprobopÖªobpfifbk`bªqbpqp"+ 18 The Fundamental Principles of Financial Regulation qlªrkabopq^kafkdªqebªbsbkqpªlcªqebªdil_îªifnrfafqvª^kaªòbafqªòrkèªfkª/--4*-5 fpªqlªcliiltªqebªob^`qflkpªlcªqebªcfk^k`fîªfkpqfqrqflkpªqebjpbisbpªqlªmof`bªè^kdbp) ^kaªqlªpefcqpªfkªqebªjb^probaªofphp+ª Qebªqo^kpfqflkªqlª^ªjôhbq*_^pbaªcfk^k`fîªpvpqbjªfpªjlpqªâs^k`baªfkªqeb RkfqbaªPq^qbp)ª_rqªfqpªfkcirbk`bªe^pª_bbkªsbovªmolclrkaªcloªqebªdil_îªcfk^k`fîªpvp* qbjª^pª^ªtelib+ªBsbkªcloªqoâfqflkîªabmlpfq*q^hfkdª_^khp)ªqebfoªjôdfkîªplro`bªlc crkafkdªe^pª_bbkªqebª`^mfqîªjôhbqp)ªcloªbu^jmibªqeolrdeªobmroè^pbª^dobbjbkqp loª`ljjbo `fîªm^mbo+ªQefpªfpª_b`^rpbªqebªqoâfqflkîªplro `bªlcªcrkafkdªprèª^p obq^fiªabmlpfqpªôbªrprîivªfkprccf`fbkqivªcibuf_ibªqlªcrkaªbum^kpflkpªlcªibkafkd+ Jloblsbo)ªqebªpmobâfkdªlcªcrkafkdªqlªfkìrabª`^mfqîªjôhbqpªt^pªlcqbkªpbbkª_v _^khp)ªobdri^qlopª^kaªpeôbeliabopª^pªfkòb^pfkdªqebªifnrfafqvª^kaªebk`bªqebªpli * sbk`vªlcª^ªcfk^k`fîªfkpqfqrqflkªQlªqefpªbuqbkq)ªqebªqoâfqflkîªafpqfk`qflkª_bqtbbk _^khfkdª^kaª`^mfqîªjôhbqpªe^pª_b`ljbªsbo vªafccf`riqªqlªao^t +ªFkabba)ªqebªibfq * jlqfcªcloªqebªòfpfpªlcª/--4*5ªe^pª_bbkªqebª^jmifcf`^qflkªlcªqebª_^khfkdªòfpfp qeolrdeª`^mfqîªjôhbqª`lkafqflkp)ªpmroobaªlkª_vªqebªmbo s^pfsbªrpbªlcªjôh*ql* jôhbqª^``lrkqfkdª^kaªjôhbq*pbkpfqfsbªofphªj^k^dbjbkqªpvpqbjp+ Tebkªcfk^k`fîªfkpqfqrqflkpªôbªfkqbdo^qbaªfkqlªqebª`^mfqîªjôhbqp)ªjôhbqª`lk* afqflkpªaf`q^qbªlsboîiªcrkafkdª`lkafqflkp+ªQebª_î^k`bªpebbqªavk^jf`pªlcªcfk^k * `fîªfkqbojbafôfbpªqe^qªjôhªqebfoª_î^k`bªpebbqpªqlªjôhbqª^kaªrpbªjôhbqªpbkpf* qfsbªofphªjb^probpªe^sbªpljbªafpqfk`qfsbªcb^qrobp+ª

2.4 Margin/haircut spiral

Qebªilppªpmfoîªfpªklqªmrobivªarbªqlª^ppbqªmof`bªbccb`qp)ªpfk`bª^ªibsbo^dbaªfkpqfqrqflk qe^qªprccbopªjôh*ql*jôhbqªilppbpªlcª!uªe^pªqlªobar`bªfqpªmlpfqflkª_vª!uªqfjbpªfqp ibsbo^dbªo^qfl+ª

Figure 5 Two liquidity spirals

Source: Brunnermeier and Pedersen (2009)

Nature of Systemic Risk 19

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Figure 6 Leverage growth and asset growth of US investment banks

20 ) y l r e t r a

u 10 q 5 ( h t w

o 0 r g t e s s a l a

t -10 o T

-20 -20 -10 0 10 20

Leverage growth (% quarterly)

Source: SEC; Adrian and Shin (2007)

.4 PbbªMbop^raª%/--/&+ .5 Pbbª>aof^kª^kaªPefkª%/--4&+ 20 The Fundamental Principles of Financial Regulation

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.6 Qefpªqoâfqflkîªobpmlkpb)ªj^vªe^sbª_bbkªbolabaª_vªqebªqobkaªfkªqebªjlpqªob`bkqª_lljªcloªeljb ltkbopªqlªqovªqlª_bkbcfqªcoljªiltboªfkqbobpqªo^qbpª^kaªefdeboªeljbªsîrbpª_vªcobnrbkqªobpbqqfkdªlc jloqd^dbp+ª Nature of Systemic Risk 21

^_ibªqlª^ªibsbo^dbaªfkpqfqrqflk+ªQebªob^plkªfpªqe^qªqebªe^fo`rqªabqbojfkbpªqebªjû* fjrjªmbojfppf_ibªibsbo^dbª^èfbsbaª_vªqebª_looltbo+ªFcªqebªe^fo`rqªfpª/")ªqebª_lo* oltboª`^kª_looltª65ªaliiôpªcloª.--ªaliiôpªtloqeªlcªpb`rofqfbpªmibadba+ªQebk)ªql eliaª.--ªaliiôpªtloqeªlcªpb`rofqfbp)ªqebª_looltboªjrpqª`ljbªrmªtfqeª/ªaliiôpªlc bnrfqv+ªQerp)ªfcªqebªobmlªe^fo `rqªfpª/")ªqebªjûfjrjªmbojfppf_ibªibsbo^dbª%o^qfl lcª^ppbqpªqlªbnrfqv&ªfpª2-+ Prmmlpbªqe^qªqebª_looltboªibsbo^dbpªrmªqebªjûfjrjªmbojfqqbaªibsbi+ªPrèª^k ^`qflkªtlriaª_bª`lkpfpqbkqªtfqeªqebªl_gb`qfsbªlcªjûfjfwfkdªqebªobqrokªlkªbnrf * qv)ªpfk`bªibsbo^dbªj^dkfcfbpªobqrokªlkªbnrfqv+ªQebª_looltboªqerpªe^pª^ªefdeivªibsbo* ^dbaª_î^k`bªpebbqªtfqeªibsbo^dbªlcª2-+ªªFcª^qªqefpªqfjb)ª^ªpel`hªqlªqebªcfk^k`fîªpvp* qbjªo^fpbpªqebªjôhbqªe^fo `rq)ªqebkªqebª_looltboªc^`bpª^ªmobaf`^jbkq+ªªPrmmlpb qe^qªqebªe^fo`rqªofpbpªqlª1"+ªQebk)ªqebªmbojfqqbaªibsbo^dbªeîsbpªqlª/2)ªcoljª2-+ Qebª_looltboªqebkªc^`bpª^ªeôaªèlf`b+ªBfqeboªfqªjrpqªo^fpbªkbtªbnrfqvªplªqe^qªfqp bnrfqvªalr_ibpªcoljªfqpªmobsflrpªibsbi)ªloªfqªjrpqªpbiiªeîcªfqpª^ppbqp)ªloªpljbª`lj * _fk^qflkªlcª_lqe+ Klqbªqe^qªqebªfkòb^pbªfkªe^fo `rqpªtfiiªalªjlpqªeôjªtebkªpqôqfkdªcoljªsbo v iltªibsbip+ª>ªmbo `bkq^dbªmlfkqªfkòb^pbªcoljª."ªqlª/"ªtfiiªjb^kªibsbo^dbªe^pªql cîiªcoljª.--ªqlª2-+ª?rqª^ªmbo `bkq^dbªmlfkqªfkòb^pbªcoljª/-"ªqlª/."ªtfiiªe^sb lkivª^ªjôdfkîªbccb`qªlkªqebªfkfqfîªibsbo^dbªlcª2+ªFkªqefpªpbkpb)ªqebª]è^pfkdªlc vfbia$ª^qªqebªmb^hªlcªqebªcfk^k`fîª`vìbªfpªbpmb`fîivªmob`ôflrp)ªpfk`bªqebªrktfka * fkdªlcªibsbo^dbªtfiiª_bªqe^qªjrèªjlobªmlqbkq+ Qfjbpªlcªcfk^k`fîªpqobppªôbª^ppl`f^qbaªtfqeªpeômivªefdeboªe^fo `rqp)ªkb`bppfq^q* fkdªpr_pq^kqfîªobar`qflkpªfkªibsbo^dbªqeolrdeª^ppbqªafpmlpîpªloªo^fpfkdªlcªkbt bnrfqv+ªQebªq^_ibª_biltªfpªq^hbkªcoljªqebªL`ql_boª/--5ªfpprbªlcªqebª Dil_î Cfk^k`fî Pq^_fifqv Obmloq lc qeb Fkqbok^qflkî Jlkbqôv Crka %FJCª%/--5&&)ª^kaªpeltp qebªe^fo`rqpªfkªpb`robaªibkafkdªqo^kp^`qflkpª^qªqtlªa^qbpªåªfkª>mofiª/--4ª_bclobªqeb cfk^k`fîªòfpfpª^kaªfkª>rdrpqª/--5ªfkªqebªjfapqªlcªqebªòfpfp+ªE^fo`rqpªôbªpr_pq^k* qfîivªefdeboªarofkdªqebªòfpbpªqe^kª_bclob+ O^fpfkdªkbtªbnrfqvªloª`rqqfkdª^ppbqpªbkq^fiªâgrpqjbkqpªcloªqebª_looltbo+ªO^fpfkd kbtªbnrfqvªfpªklqloflrpivªafccf`riqªfkªafpqobppbaªjôhbqª`lkafqflkp+ª?rqªpbiifkd ^ppbqpªfkª^ªabmobppbaªjôhbqªfpªklqªjrèª_bqqbo +ªQebªbsfabk`bªcoljªqebªp`^qqbo èôqªfkªCfdrobª3ª^_lsbªfpªqe^qª_looltbopªqbkaªqlªâgrpqªibsbo^dbªmofjôfivªqeolrde âgrpqjbkqpªfkªqebªpfwbªlcªqebª_î^k`bªpebbq)ªib^sfkdªbnrfqvªrkè^kdba)ªo^qebo qe^kªqeolrdeªè^kdbpªfkªbnrfqvªafob`qiv+ª

Table 1 Haircuts on repo agreements (percent)

Pb`rofqfbp >mofiª-4 >rdrpqª-5 RPªqob^profbp -+/2 0 Fksbpqjbkq*do^abª_lkap -å0 5å./ Efde*vfbiaª_lkap .-å.2 /2å1- Bnrfqfbp .2 /- Pbkfloªibsbo^dbaªil^kp .-å./ .2å/- Jbww^kfkbªibsbo^dbaªil^kp .5å/2 02( MofjbªJ?P /å1 .-å/- >?P 0å2 2-å3-

Source: IMF Global Financial Stability Report, October 2008 22 The Fundamental Principles of Financial Regulation

2.5 Procyclicality and margin spirals

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2.6 Externalities – rationale for regulation

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2.7 Aggregate liquidity expansions and contractions

Tbª`lkìrabªqefpªpb`qflkª_vªob`îifkdªqe^qªfkpqfqrqflkpªqe^qªeliaª^ppbqpªtfqeªefde jôhbqªifnrfafqvª%loªpeloq*qbojª^ppbqp&ª`^kªâgrpqªqebfoª_î^k`bªpebbqªpfwbªcibuf_iv _vªobar`fkdªibkafkdª^kaªklqªoliifkdªlsboªab_q+ªEltbsbo )ªtebkªqebªcfk^k`fîªpvp *

/- Tefibªjlpqª`roobkqªofphªjb^probpªifhbªSîrb*^q*Ofphª%SÔ&ªcl`rpªlkªqebªofphªlcª^kªfkafsfarîªcfk^k * `fîªfkpqfqrqflk)ª>aof^kª^kaª?orkkbojbfboª%/--5&ªabsbilmª^ªkbtªofphªjb^prob)ª"@lS Ô)"ªqe^qªbumif`fq* ivªq^hbpªqebªofphªpmfiilsbopªfkqlª^``lrkq+ /. Lkªkbqtlohªbccb`qp)ªpbbª?orkkbojbfboª%/--6&+ // Qla^v)ªqefpªklqflkªe^pª_bbkªmlmriôfpbaª_vªK^pfjªQ îb_ª^pª^ª"_i^`hªpt^k+" 24 The Fundamental Principles of Financial Regulation qbjª^pª^ªtelibªeliapªilkd*qboj)ªfiifnrfaª^ppbqpªcfk^k`baª_vªpeloq*qbojªif^_fifqfbp) ^kvªqbkpflkpªobpriqfkdªcoljª^ªpeôm)ªpvkèolkfwbaª`lkqo^`qflkªlcª_î^k`bªpebbqp tfiiªpeltªrmªpljbtebobªfkªqebªpvpqbj+ªBsbkªfcªpljbªfkpqfqrqflkpª`^kªâgrpqªaltk qebfoª_î^k`bªpebbqpªcibuf_iv)ªqebobªtfiiª_bªmfkèªmlfkqpªfkªqebªpvpqbjªqe^qªtfiiª_b bumlpbaª_vªprèªab*ibsbo^dfkd+ª Cir`qr^qflkpªfkªibsbo^dbªfkªqebª`lkqbuqªlcªtfabpmobâªpb`robaªibkafkdªbumlpbp qebªjvqeªlcª]irjmªlcªifnrfafqv$ªfkªqebªcfk^k`fîªpvpqbj+ªFqªfpªqbjmqfkdªqlª_bªjfpiba _vªlroªrpbªlcªi^kdr^dbªfkqlªqefkhfkdªqe^qª]ifnrfafqv$ªobcbopªqlª^ªpql`hªlcª^s^fi^_ib crkafkdªfkªqebªcfk^k`fîªpvpqbjªtefèª`lriaª_bªobafpqof_rqbaªqlªqelpbªtelªkbbaªfq jlpq+ªªTebkªifnrfafqvªaofbpªrm)ªfqªafp^mmbôpªîqldbqeboªo^qeboªqe^kª_bfkdªob*îil * `^qbaªbipbtebob+ªTebkªe^fo `rqpªofpb)ªîiª_î^k`bªpebbqpªpeofkhªfkªrkfplk+ªQerp) qebobªfpª^ªdbkboîfwbaªabìfkbªfkªqebªtfiifkdkbppªqlªibka+ªTebkª^ª_^khªprèª^p KloqebokªOl`hªcfkapªfqpbicª^qªqebªob`bfsfkdªbkaªlcª^ªorkª_vªfqpªòbafqlop)ªfqª`^kklq pfjmivªqrokªqlª^klqeboªòbafqloªqlªq^hbªrmªqebªpi^`h)ªcloªîiªlqeboªòbafqlopªôb pfjriq^kblrpivª`roq^fifkdªqebfoªibkafkd+ªFkªqefpªpbkpb)ªifnrfafqvªpelriaª_bªrkabo * pqllaªfkªqbojpªlcªqebªdoltqeªlcª_î^k`bªpebbqpª%f+b+ª^pª^ªcilt&)ªo^qeboªqe^kª^pª^ pql`h+ 3 Who Should be Regulated (by Whom)?

Fkª@e^mqboª/ªtbªmolsfabaª^ªqeblobqf`îªclrka^qflkpªcloªqebªobdri^qflkªlcªcfk^k`fî cfojpª_vªlrqifkfkdª^kªrkaboivfkdªjbè^kfpjªtefèªibâpªbkaldbklrpivªqlªcfk^k * `fîªfkpq^_fifqv+ªQebªcfopqªnrbpqflkªlkbªe^pªqlªâaobppªfp7ªTelªpelriaª_bªobdri^qba< Pfk`bª^kvªbccb`qfsbªobdri^qflkªclo `bpªcfojpªqlªabsf^qbªcoljªqebfoªmobcboobaªlmqflk) qebvªît^vpªe^sbª^kªfk`bkqfsbªqlªjlsbªqebfoª_rpfkbppªlrqpfabªqebª_lrkaôvªlcªobd* ri^qflk+ªFqªfpªqebkªklªpromofpbªqe^qªqebªâsbopbªjbè^kfpjªabpòf_baªfkª@e^mqboª/ ob^mmbôpªfkªqebªrkobdri^qbaªpb`qlo )ªtefèª`îipªqebkªcloªdlsbokjbkqªprmmloq tebkª^ªòfpfpªefqp+ª@ljjbo `fîª_^khpªpbqqfkdªrmª^ppl`f^qbaª`lkarfqp)ªPFSpª^ka ebadbªcrkapªfkªqebªi^pqªòbafqª_r__ibªfpª^ªsfsfaªobjfkaboªlcªqefpª]_lrkaô vªmol_* ibj$)ªtefèªfpªafp`rppbaªfkªcroqeboªabq^fiªfkª>mmbkafuª>+ Fkªqefpªpb`qflkªtbªmolmlpbªpljbªdrfafkdªmofk`fmibpªlkªqebªp`lmbªlcªobdri^qflk) _bclobªbjme^pfwfkdªqebªfjmloq^k`bªlcª`lrkqbo*`vìf`îªcfk^k`fîªobdri^qflk %@e^mqboª1&ª^kaªifnrfafqvª^kaªj^qrofqvªjfpj^qèbpª%@e^mqboª2&+ª

3.1 Classification of financial institutions based on objective risk- spillover measures

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/0 Obdobppfkdª^kªfkabuªlcªcfk^k`fîªfkpqfqrqflkpªloª_^khªUÖpª`lrkqbomôqfbpªlkª_^khªUªtfqeªnr^kqfib obdobppflkpªfpªlkbªqo^`q^_ibªt^vªqlªbpqfj^qbªqebª%klk*qfjbsô vfkd&ª@lSÔ+ªCloªjlobªabq^fipªpbb >aof^kª^kaª?orkkbojbfboÖpªtlohfkdªm^mboªqfqibaª"@lS Ô")ªeqqm7,,ttt+mofk`bqlk+bar,{jôhrp,obpbôè, m^mbop,@lSÔ+ªQebªtlohª_vªPbdlsf^kl)ªlcªqebªFJC)ª^kaªDllaeôqª%/--6&ªbu^jfkfkdªqebªbccb`qªlkªqeb Mol_^_fifqvªlcªAbc^riqªlcªlqeboª_^khpªfkªqebªpvpqbj)ª`lkafqflkbaªlkªqebªc^firobªlcª^kvªpmb`fcf`ª_^kh) fpª^klqeboªbubo`fpbªfkªqefpªp^jbªdbkob+

25 26 The Fundamental Principles of Financial Regulation ofphªlcª^ªpfkdibªfkpqfqrqflk)ª@lS Ôª`^mqrobpªqebªifkhpª^òlppªpbsboîªfkpqfqrqflkp+ Jlobªpmb`fcf`îiv)ª_^khªUÖpª@lSÔªfpªqebª`lkafqflkîªS Ôªlcª_^khªUÖpª`lrkqbomô * qvªloªqebªtelibªcfk^k`fîªpb`qloª^cqboª`lkafqflkfkdªqe^qª_^khªUªfpªfkªafccf`riqv+/1 Fk môqf`riô)ªfcª_^khªUª`^rpbpªpljbªofphªpmfiilsbopªlkªfqpª`lrkqbomôqfbp)ªqebkªqeb @lSÔªbu`bbapªqebªrk`lkafqflkîªS Ô+ªPrèª^ªofphªpmfiilsboªjb^probªpelriaª_b prmmibjbkqbaªtfqeªpqobppªqbpqpªp`bkôflp+ Qebªofph*pmfiilsboªlcª^ªcfk^k`fîªmi^vboª`^kª_bªefdeªfcªfqª%f&ª `^rpbp cfk^k`fîªafccf* `riqfbpª^qªlqeboªfkpqfqrqflkpªloªfqªfpª%ff&ª pfjmiv `loobi^qba tfqeªcfk^k`fîªafccf`riqfbp ^jlkdpqªlqeboªcfk^k`fîªfkpqfqrqflkp+ª>ªdllaªofph*pmfiilsboªjb^probªpelriaªbk`lj* m^ppª_lqeªè^kkbip)ª_rqªqefpªafpqfk`qflkpªebimpªrpªqlªdolrmªcfk^k`fîªfkpqfqrqflkp ^p7ª

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0+ªKlk*pvpqbjf`ªiôdb ^kaªklqªefdeivªibsboba %b+d+)ªFkpro^k`bª@ljm^kfbpª^ka Mbkpflkªcrkap& Qebpbªfkpqfqrqflkpªkbbaªcriiªjfòl*morabkqfîªobdri^qflk)ª_rqªklªâafqflkî j^òl*morabkqfîªobdri^qflk+

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/1 Qebªp^jbª"`lkafqflkfkd*jbqela"ª`^kª_bªrpbaªcloª^kvªofph*jb^probª^kaªfpªklqªobpqof`qbaªqlªS Ô) tefèªfpªklqªqebªfabîªofphªjb^prob+ªQebª"`l*bumb`qbaªpeloqcîi"ªfpª^kªîqbok^qfsbªpmfiilsboªofphªjb^p * rob+ /2 JâlccÖpªcrkaªafaªklqªrpbª^ªpbmô^qbªmofjbª_olhbo )ªpfk`bªebªeâªefpªltkª_olhbo,abîboª_rpfkbpp+ Qefpªt^pª^hfkªqlªîiltfkdªcolkqª^kaª_^`hªlccf`bpªqlªjbodb)ª^kaªpelriaªkbsboªe^sbª_bbkªîiltba+ Who Should be Regulated (by Whom)? 27

>qªlkbªpq^dbªtbªmolmlpbaªqe^qªqebªobdri^qlop,prmbo sfplopªpelriaªmr_ifpeªqe^q ifpq)ªfkªloaboªqlªbke^k`bªqebªafp`fmifkbªqe^qªtlriaªfjmlpbªlkªobdri^qlop,prmbo sf* plopªqlªalªqefpªbubo `fpbª`ôbcriiv+ª?rqªtbªe^sbª_bbkªmboprâbaªqe^qªqebªafpâs^k * q^dbpªlcªqe^qª`lropbªlrqtbfdeªqebªâs^kq^dbp+ªKlqªlkivªfpªqebª`lk`bmqªlcªÖpvpqbjf`Ö crwwvª^kaªpq^qb*`lkqfkdbkq)ª_rqªîplªfqª`lriaªibâªqlªjloîªe^wôaª^kaªqlªôqfcf`fî _be^sflroª^jlkdªqebªobdri^qbaªfkªqebfoª^qqbjmqªqlª^èfbsbªqebfoªabpfobaªpq^qrp8 qefpªj^vªobmobpbkqª^ª`^pbªcloªÖ`lkpqor`qfsbª^j_fdrfqvÖ+ /3

3.2 Rules for individually systemic institutions

Ibqªrpªobsboqªqlªfkpqfqrqflkpªqe^qªôbªfkafsfarîivªpvpqbjf`+ªQebobªpelriaª_bªpboflrp `lk`bokª^_lrqªîiltfkdª^kv lcªqebjªfkafsfarîivªqlªdbqªfkqlªqolr_ib+ªQe^qªjb^kp qe^qªjfòl*morabkqfîªobdri^qflkª^kaªprmbosfpflkªobj^fkªobibs^kq+ªQebªbpq^_ifpeba clojªlcªprèªjfòl*morabkqfîªobdri^qflkªcloª_^khpªobj^fkpª?^pbiªFF+ªT bªâsl`^qb qe^qªqefpª`lkqfkrbpªqlª_bª^mmifba)ª^pªlofdfkîivªmolmlpba)ªqlªiôdbªpvpqbjf`)ªfkqbo * k^qflkîª_^khp)ª^kaªqe^qªqebª^mmolmof^qbªjfòl*morabkqfîª`lkqolipª`lkqfkrbªîpl qlª_bª^mmifbaªqlªiôdbªrkibsbobaªfkpqfqrqflkp+ Qefpªfpªklqªqlªp^vªqe^qªqebªjbqelapªcloª^ppbppfkdªofph*tbfdeqbaª^ppbqpª%OT>p&ªal klqªkbbaªobcloj8ªqebvªal+ª>pªe^pª_bbkªbubjmifcfbaªqeolrdelrqªqebª`roobkqªcfk^k * `fîªòfpfp)ªqebªofphpªqlª^ª_^khÖpªifnrfafqvª^kaª`^mfqîªôfpbªfkªiôdbªmôqªcoljªqe^q _^khÖpªlcc*_î^k`b*pebbqªbumlprobpª^kaª`lkqfkdbkqªif^_fifqfbp)ªb+d+)ªfkª_^`h*rmªifkbp lcªòbafqªqlª`lkkb`qbaª`lkarfqp)ªPMSp)ªPFSp)ªbq`+)ª^kaªfkªabofs^qfsbªjôhbqp+ªQeb ?^pbiª@ljjfqqbbªe^pªalkbªdllaªtloh)ªtefèªkbbapªqlª_bªbuqbkabaªcroqeboªklt ) fkª^ppbppfkdªeltªprèª`lkqfkdbkqª`ljjfqjbkqpªpelriaª_bªfk`lomlo^qbaªfkql jb^probpªlcªOT>p+ Jloblsbo)ªòbafqªo^qfkdp)ªtebqeboª_vª@O>pªloª_vªqebª_^khpªqebjpbisbp)ªôbª^ jb^probªlcªbumb`qbaªilpp)ªklqªlcªrkbumb`qbaªilpp+ªCloªqebªi^qqbo)ªte^qªlkbªkbbapªfp pljbªbpqfj^qbªlcªqebªifhbifellaªlcªaltktôapªo^qfkdªjfdo^qflk)ª^kaªlcªqebªobpriq* fkdªp`îbªlcªilppªfkªqe^qªbsbkq7ª^ªafccf`riqªbubo `fpb)ª_rqªklqªfjmlppf_ib+ /4 Jlobª^qqbkqflkªpelriaªîplª_bªdfsbkªqlªafsbopfcf`^qflk)ª_rqª`ôbªpelriaª_bªdfsbk qlªafpqfkdrfpefkdª_bqtbbkªfaflpvkò^qf`ª^kaªpvpqbjf`ªafsbopfcf`^qflk+ /5 >ª_^kh tefèª`lk`bkqo^qbp)ªcloªbu^jmib)ªqlqîivªlkªil^kpªqlª^ªmôqf`riôª`^qbdlo vªlcª_lo* oltbopªfkª^ªmôqf`riôªobdflkªe^pªklªfaflpvkò^qf`ªafsbopfcf`^qflk8ªf+b+)ªfqªfpªpr_gb`q qlª`boq^fkªl_sflrpªofphp)ª%f+b+ªfcªabj^kaªcloªprèª_looltbopÖªmolar`qpªabìfkbp&+ Eltbsbo)ª_bfkdªrkifhbªjlpqªlqeboª_^khp)ªfqªfpªibppªifhbivªqlª`^rpbª`lkq^dflk)ªlo pmfii*lsboªofphp)ªpelriaªfqªc^fi+ªPrèª^ª_^khªfp)ªqebobclob)ªibppªa^kdbolrpªqlªqebªpvp * qbjª^pª^ªtelib)ª^kaªkbbapªklªmôqf`riôªbuqo^ªj^òl*morabkqfîªobdri^qflk+ªFqª`^k j^hbªfqpªltkªèlf`bp)ªtfqelrqªbuqbokîªmobpprob+ªFaflpvkò^qf`ª`lk`bkqo^qflkªalbp klqª`^rpbªpvpqbjf`ªpmfii*lsboªofph+ Oribpªpelriaªîplª_bªabpfdkbaªfkªprèª^ªt^vªqe^qª_^khpªe^sbªklªfk`bkqfsbªql jlsbª^ppbqpªfkqlªlcc*_î^k`bªpebbqpªsbefìbpª^kaª`lkarfqp+ª>pªlrqifkbaªfk ?orkkbojbfboª%/--6&ªrkaboªqebª`roobkqªpvpqbjª_^khpªeâª^kªfk`bkqfsbªqlªmôhª^ka

/3 Lkbªmlppf_ibªt^vªqlªfkòb^pbªqebªafp`fmifkbªlkªqebªobdri^qlop,prmbo sfplopªtlriaª_bªcloªqebjªqlªafp * ìlpbª^kaªafp`rppªqebfoªifpqªfkª^ªìlpbaªpbppflkª_bclobª^ªPbib`qª@ljjfqqbbªlcªqebfoªIbdfpi^qrobªlk`b bsbovªvbô+ /4 Qebªj^qrofqvªâgrpqjbkqªfkªqebªFO?ª^mmol^èªlcª?^pbiªFFª`^kª_bªpbbkª^pª^ªolrdeª^qqbjmqªqlªq^hbªfkql ^``lrkqªqebªmlppf_fifqvªlcªaltktôapªo^qfkdªjfdo^qflk+ /5 Lkªqefpªqlmf`)ªob`bkqªm^mbopª_vª>èô v^ª^kaªVlorij^wbo)ª^kaª_vªT+ªT^dkboªôbªdboj^kb+ 28 The Fundamental Principles of Financial Regulation afsbopfcvª^ppbqpªfkªlcc*_î^k`bªpebbqªsbefìbpªfkªloaboªqlªj^fkq^fkª^ªiltboª`^mfqî èôdb+

3.3 Rules for institutions that are ‘systemic in a herd’

Tbªkltª`lkpfaboªqebªiôdboªkrj_boªlcªpjîiboªfkpqfqrqflkp)ªjlpqivªpjîiª_^khp) clobfdkª_o^kèbpª^kaªpr_pfafôfbp)ªjlpqªebadbªcrkap)ªmofs^qbªbnrfqv )ªbq`+)ªtelªôb klqªfkafsfarîivªpvpqbjf`)ª_rqªj^vª_b`ljbªplªtebkªqebvªjlsbªqldbqeboª^pª^ dolrmª%loªeboa&+ª@lkpfaboª^ªpvpqbjªlcª k afccbobkqª_^khp)ªtebobªb^èªe^pª^ªmloqcl * iflª`lkpfpqfkdªlcª^kªfabkqf`îªco^`qflkª%., k&ªlcªqebª^ddobd^qbªmloqclifl)ª%^ªobmobpbk * q^qfsbª_^khªpvpqbjªfkªbccb`q&+ªFcªlkbª_^khªc^fip)ªqebªifhbifellaªfpªqe^qªîiªtfii+ª>ªofph* pmfiilsboªjb^probªtlriaª`î`ri^qbªqebª^ddobd^qbª_^khªmloqcliflªfkªqebª`lrkqov)ª^ka qebkª`ljmrqbªeltªjrèªqebªfkafsfarîª_^khpÖªmloqcliflpª`loobi^qbªtfqeªqebª^ddob* d^qb+ªQebªefdeboªprèª`loobi^qflk)ªqebªibppªafsbopfcfbaªqebªpvpqbj+ª>pªrprîªtfqeªofph ^ppbppjbkq)ª`l*sôf^k`bªfpªjlobªfjmloq^kqªqe^kªsôf^k`b+ªPfk`bªtbªcl`rpªlkª%ibcq& q^fi*bsbkqp)ª`l*ofphªjb^probpªôbªprmbofloªqlªpfjmibª`lsôf^k`bªjb^probp+ª Qebªmol_ibjªtfqeª?^pbiªFFªt^pªklqªplªjrèªqe^qªfqªt^pª^kªfk`loob`qªjbqof`ªlc jfòl*morabkqfîªofphª%qelrde)ªlcª`lropb)ªfqªt^pªqlªpljbªbuqbkq&)ª_rqªqe^qªfqªqllh fkprccf`fbkqª^``lrkqªlcªj^òl*morabkqfîªofph)ª^pªpbqªlrqª^kaªôdrbaªfkª@e^mqboª/+ Tbªôdrbªqe^qª_bqqboªjb^probpªlcªj^òl*morabkqfîªofphªôbªqlª_bªclrkaªfkªibsbo^db o^qflp)ªj^qrofqvªjfpj^qèbpª^kaªbpqfj^qbpªlcª_^khªòbafqªbum^kpflkª^kaª^ppbq mof`bªbum^kpflkp+ª Qefpªdolrmªfpª`roobkqivªafsfabaªfkªfqpªsfbtªeltªqlªobdri^qbªqefpªdolrmªlcªcfk^k * `fîªfkpqfqrqflkpªcloªjfòl*morabkqfîªmromlpbp+ªLkbªsfbtªfpªqe^qªqefpªtfaboªo^kdb lcª%fkafsfarîivªklk*pvpqbjf`&ªfkqbojbafôfbpªpelriaªpqfiiª_bªpr_gb`qªqlªfkafsfarî jfòl*morabkqfîªobdri^qflk+ª@lkqoliifkdªqebfoªfkafsfarîª^pprjmqflkªlcªofph obj^fkp)ªlkªqefpªsfbt )ª_lqeª^ªabpfo^_ibª^kaª^mmolmof^qbªcrk`qflkªlcªobdri^qflk, prmbosfpflk+ªFcªprèªjfòl*morabkqfîªprmbo sfpflkªfpªfkªclo`b)ªqebkªqebªj^òl*mor* abkqfîªc^`qlopª`^kª_bªfkqbo^`qbaªtfqeªqebjªîlkdªbu^`qivªqebªp^jbªifkbp)ª^pªtb molmlpbªfkªqebªcliiltfkdª@e^mqbopªcloªpvpqbjf`ªfkpqfqrqflkp+ª Qebªlqeboªsfbtªfpªqe^q)ªfcª^kªfkpqfqrqflkªfpªklqªfqpbicªÖpvpqbjf`Ö)ªqebobªôbªklªqeb * lobqf`îªdolrkapªcloªbuqbokîªfkqbocbobk`bªfkªfqpªltkªèlpbkªofphªmolcfib8ªpl)ªlkªqefp sfbt)ªqebobªtlriaª_bªklªkbbaªcloª^kv jfòl*morabkqfîªobdri^qflk+ªFkpqbâ)ªîiªqe^q tlriaª_bªobnrfobaªtlriaª_bªpljbªpfjmifcfbaªj^òl*morabkqfîªobnrfobjbkqp) obi^qfkdª`lobª`^mfqîªqlªibsbo^dbª^ka)ªmboe^mp)ªqebªfkqbojbafô vÖpªo^qbªlcª^ppbq bum^kpflkª%doltqe&+ Mboe^mpªb^èª`lrkqovÖpªobdri^qlop,prmbosfplopª`lriaªèllpbª_bqtbbkªqebpbªîqbo* k^qfsbp)ªtefèª`lriaªîplªafccboª_bqtbbkªqvmbpªlcªfkqbojbafôfbp)ªqerpª_^khpª`lria _bªqob^qbaªafccbobkqivªcoljªebadbªcrkap+

3.4. International considerations for international entities

Qvmf`îivªlkbªlcªqebªdob^qbpqª`lk`bokpª^jlkdpqª_lqeª_^khpª^kaªmlifqf`f^kpªobi^qbp klqªplªjrèªqlª`ljmbqfqfsbªfkbnrîfqfbpª^jlkdpqª^kaª_bqtbbkªaljbpqf`ª_^khp) _rqªqelpbª_bqtbbkªaljbpqf`ªltkbaª_^khpª^kaªpr_pfafôfbpª^kaª_o^kèbpªlcªclobfdk _^khp+ªLroªmofk`fmibªfpªqe^qªqebª`lrkqo vªloªbkqfqvªqe^qª_bôpªqebª_roabkªfkª`^pbªlc Who Should be Regulated (by Whom)? 29

^ª_^filrqªlcª^ªcfk^k`fîªfkpqfqrqflkªpelriaªîplª_bªfkªèôdbªlcªobdri^qfkdªqe^q cfk^k`fîªfkpqfqrqflk+ªEbk`b)ªtbªtlriaªprddbpqªqe^qª^kvª_o^kèª%lcªclobfdk*ltkba& _^khpªabpfdk^qbaª^pªÖpvpqbjf`Öª_vª^ªelpqª`lrkqovªpelriaª^rqlj^qf`îivª_bªobnrfoba qlªè^kdbªfqpªpq^qrpªqlª_bfkdª^ªpbmô^qbivª`^mfqîfpbaªpr_pfafô v+ªQebkªbu^`qivªqeb p^jbª`^mfqîª^kaªifnrfafqvªâbnr^`vªobnrfobjbkqª`î`ri^qflkpªtlriaª^mmivªqlªclo * bfdk*ltkbaªpvpqbjf` pr_pfafôfbp/6 ^pªqlªaljbpqf`ª_^khpª+ª >pª^ª`lkpbnrbk`b)ªfcª^ª_^khªpelriaªèllpbªqlªlmbkª_o^kèbp,pr_pfafôfbpªfkª^ clobfdkª`lrkqovªqe^qªôbªiôdbªbklrdeªqlª_bªabcfkbaª_vªqe^qªelpqª`lrkqo vª^pªÖpvp* qbjf`Ö)ªqebkªfqªtfiiªe^sbªqlªeliaª^ªpbmô^qbªmlqªlcª`^mfqîªfkªqe^qª`lrkqo v)ª^``loa* fkdªqlªqebªelpqª`lrkqo vÖpª`î`ri^qflkp+ªQe^qªtfiiªobar`bªqebªpvkbodfbpªlcªòlpp*_lo * aboª_^khfkd+ªFqªîplªo^fpbpªqebªnrbpqflkªlcªtebqeboª%^kaªeltªcô&ªprèªpbmô^qbªmlqp pelria,`lriaªdlªqlªp^qfpcvªqebª@>Oªlcªqebª`lkplifa^qbaª_^kh+ªLroªsfbtªfpªqe^qªobd* ri^qlop,prmbosfplopªôbªmofjôfivª`lk`bokbaª^_lrqª`lkafqflkpªfkªqebfoªltkª`lrk * qofbpª%^pªe^pª`boq^fkivª^mmbôbaªqlª_bªqebª`^pbªfkªmo^`qf`bªfkªqebª`roobkqªòfpfp&+ªFc pl)ªqebªeljbªobdri^qloªtlriaªobi^qbªqebª@>OªqlªqebªO T>,Ibsbo^dbªo^qflªfkªqeb eljbª`lrkqovªmirpªqebªÖklk*pvpqbjf`Öª_o^kèbp,pr_pfafôfbpªfkªlqeboª`lrkqofbp+ªTb obîfpbªqe^qªqefpªtlriaª_bªrkmf`hfkdª^ªmôqªlcªqebªmofloªmofk`fmibªlcª`lkplifa^qflk lkªqebªeljbªobdri^qlo+ª Tbªtlriaªbk`lro^dbª^ªjlobªBrolmb^kª^mmol^èªtfqefkªqebªBrolªôb^+ªFcª_ro * abkªpeôfkdª`lriaª_bª^dobbaªrmlkªtfqefkªBroli^ka)ªobdri^qflkª`lriaª_bªqo^kp * cboobaªqlª^ªBrolmb^kªfkpqfqrqflk+

/6 Fcª^ªpr_pfafôv)ªloª^ª_o^kè)ªlcª^ªclobfdk*ltkbaª_^khªpfqbaªfkªpljbª`lrkqo v)ª%bpmb`fîivªfkª^kªlcc* pelobª`bkqob&)ªt^pªmofjôfivªbkd^dbaªfkªclobfdk*`roobk`v)ªbkqobmlq)ª_rpfkbpp)ª%b+d+ªfkqbojbaf^qfkdªfk brol*jôhbqp&)ªtbªtlriaª^pprjbªqe^qªqebªelpqª`lrkqo vªtlriaªklqª`^qbdlofwbªqe^qªpr_pfafô v,_o^kè ^pª_bfkdªÖpvpqbjf`Öªfkªfqpªltkªjôhbq+ªMboe^mpªclobfdk*ltkbaª_^khpªjfdeqªt^kqªqlªafsfabªqebfoªlmbo * ^qflkpªfkª^ªelpqª`lrkqo vªfkqlªqtlªmôqp)ª^ªklk*pvpqbjf`ª_o^kèªorkkfkdªc+`+ªbkqobmlqªlmbo^qflkp) ^kaª^)ªmlppf_ivªpvpqbjf`)ªpr_pfafô vªabîfkdªj^fkivªfkªelpqª`lrkqo vª_rpfkbpp+

4 Counter-Cyclical Regulation

Fkª@e^mqbopª.ª^kaª/)ªtbªklqbaªqebªmol*`vìf`îfqvªqe^qªcliiltpªcoljª_^khpªè^pfkd obqrokpªlkªbnrfqv)ªj^fkq^fkfkdªsîrbª^qªofph)ª^kaªrpfkdªjôh*ql*jôhbqªsîr^qflk ^kaªofphª^mmol^èbp+ªTbªîplªefdeifdeqbaªqebªpr_pq^kqfîªofphpªcloªqebªcfk^k`fîª^ka b`lkljf`ªpvpqbjªtebkªqebª`vìbªqrokpªaltk+ªFkªqefpª@e^mqboª^kaªqebªkbuq)ªtb abpòf_bªeltª`lrkqbo*`vìf`îªobdri^qflkªj^vª_bªmrqªfkªmi^`b+ªQebobªôbªqtlªj^fk pqo^kapªlcªcfk^k`fîªobdri^qflk)ªlkbªlkª`^mfqîª^kaªlkbªlkªifnrfafqv +ªTbªafp`rpp `^mfqîªobdri^qflkªfkªqefpªpb`qflkª^kaªkbtª^mmol^èbpªqlªqebªobdri^qflkªlcªifnrfa * fqvªfkª@e^mqboª2+ªQebªj^fkªmofk`fmibpªqe^qªtbªfkslhbªôb7

.+ Qebªj^fkªl_gb`qfsbªlcª`lrkqbo*`vìf`îªobdri^qflkªpelriaª_bªqlªobar`b qebªpvpqbjf`ªofphªqe^qªcir`qr^qflkpªfkªqebª`lkafqflkpªlcª^kªfkpqfqrqflk) loªjôhbq)ªtlriaªe^sbªlkªqebªobpqªlcªqebªpvpqbj+ªPvpqbjf`ªfkpqfqrqflkp %jôhbqp&ªpelriaª_bªobdri^qbaªfkªafob`qªmolmloqflkªqlªqebfoªpvpqbjf` ofph+ªQ lª^èfbsbªqefp)ª@>Opªôbªkbbabaªqe^qªôbª_^pbaªlkª_bqqboªofph pmfiilsboªjb^probpªqe^qªq^hbªibsbo^db)ªj^qrofqvªjfpj^qèª^kaªcfk^k`fkd fkqlª^``lrkq+ª /+ Qebªjb^probpªe^sbªqlª_bª`lrkqbo*`vìf`î)ªf+b+ªqlrdeªarofkdª^ªòbafq _lljª^kaªjlobªobiûbaªarofkdª^ªòfpfp+ªTbªmolmlpbª^ªiâabobaªobpmlkpb qlªbkprobª^ªmoljmqªobplirqflkªlcªbjbodfkdªmol_ibjpª_bclobªqebvª`^k pmfiiªlsboªqlªqebªtfaboªcfk^k`fîªpvpqbj+ 0+ Qlªbkprobªpqof`qªâebobk`bª^kaªfjmibjbkq^qflkªlcªprèªoribp)ªfqªfp fjmloq^kqªqlªmrqª^kªfk`bkqfsbªpqor`qrobªcloªobdri^qlopªfkªmi^`bª^kaªdrô* ^kqbbªqebfoªfkabmbkabk`bªcoljªmlifqf`îª^kaªil__vfkdªmobpprob+

4.1 Focus on systemic risk spillovers

@^mfqîªèôdbpªpelriaªcl`rpªlkªqebªofphªpmfiilsbopª^kªfkpqfqrqflkª`^rpbp)ªloªfpª`lo * obi^qbaªtfqe)ªo^qeboªqe^kªpfjmivªqebªfkpqfqrqflkÖpªfkafsfarîªofph+ª>pªklqbaªbôifbo ) `roobkqªobnrfobaªjfkfjrjª`^mfqîªâbnr^`vªo^qflpªmolsfabªsbo vªifqqibªobpfifbk`b ^kaªprmmloqªqlªqebªpvpqbj+ªBsbkªpl)ªtbªpqfiiªâsl`^qbª^ªilt)ªcfubaªjfkfjrjªibsbo* ^dbªo^qflªcloª`^mfqî)ªklqª^pª^ªmolqb`qflkªcloªqebªobdri^qbaª_^khp)ª_rqª^pª^ªmolqb` * qflkªcloªqebªabmlpfqªfkpro^k`bªcrkaª%AFC&ª^kaªqebªqûm^vbo )ª^kaª^pª^ªqofddboªclo moljmqª`loob`qfsbª^`qflk+ªQefpª`lriaª_bªpbqª^pª^ªiltªmbo `bkq^dbªlcªqlqîª_î^k`b* pebbqª^ppbqpª^kaª^ªiltªifnrfafqvªofphªjb^probª%^pªlrqifkbaªfkª@e^mqboª2&+ªPfk`bªqeb l_gb`qfsbªebobªfpª^ªpfjmibªmolqb`qflkªcloªqebªAFC)ª^ªibsbo^dbªo^qflªtlriaªpbbjªjlob

31 32 The Fundamental Principles of Financial Regulation

^mmolmof^qbªqe^kª^ªO T>ª_^pfp)ª_rqªtbªôbªklqªcfubaªlkªqefpªsfbt +ªRkaboªCAF@F> %.66.&ªqefpªmbo `bkq^dbªt^pªpbqª^pª/")ªqelrdeªqebªôdrjbkqpªcloªèllpfkdªqefp o^qeboªqe^kª^klqeboªkrj_boªôbªklqªìbôª%^qªib^pqªqlªrp&+ªLsboîi)ªeltbsbo )ªqeb cl`rpªpelriaª_bªlkªofphªpmfiilsbopªqe^qªmlqbkqfîivªrkabojfkbªqebªcfk^k`fîªpvpqbj ^pª^ªtelib+ª

4.2 When to look out for systemic risk?

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4.3 Predicting institutions’ future systemic risk contributions

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4.4 How to impose charges

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00 Qebobªe^sbª_bbkªlqeboªprddbpqflkpª^pªtbii+ªGlekªT fiif^jplkª%mofs^qbª`loobpmlkabk`b&ªtlriaªâsl * `^qbªrpfkdª^ªjb^probªlcªabmôqrobªcoljªbpqfj^qbaªbnrfif_ofrjªsîrbp)ª^kaªObmriil)ªbqªî+)ª%/--6&) tlriaªmolmlpbªrpfkdªkljfkîªDAMªdoltqeªo^qbp+ Counter-Cyclical Regulation 35

4.5 More on bank capital: two notions

Fkªqebªafp`rppflkªlcªtefèª?^pbiªFFªo^qflªqlªfkqbo^`qªtfqeªlroªj^òl*morabkqfî) `lrkqbo*`vìf`î)ª`lkqolip)ªfqªj^vªebimªqlªao^tª^ª`lk`bmqrîªafpqfk`qflkª_bqtbbk qtlªklqflkpªlcª_^khª`^mfqî+ªQebobªfp)ªcfopq)ªqebªklqflkªlcª_^khª`^mfqîª%fjmif`fqªfk qebª?^pbiª^mmol^è&ª^pª^ª_rccboª^d^fkpqªilppªqe^qªmolqb`qpªabmlpfqlop+ªRkaboªqefp cfopqªklqflkªlcª_^khª`^mfqî)ªev_ofaªì^fjpªprèª^pªmobcboobaªbnrfqvªloªpr_loafk^q * baªab_qªôbª`lrkqbaª^pª_^khª`^mfqî)ªpfk`bª_lqeªôbªì^fjpªqe^qªôbªgrkfloªqlªabmlp* fqlop+ªFkabba)ªrkaboªqebª?^pbiª`^mfqîª^``loa)ªpr_loafk^qbaªab_qª`lrkqpª^pªQ fboª/ `^mfqî+ Eltbsbo)ªqebobªfpª^ªpb`lka)ª`lkqo^pqfkdªklqflkªlcª_^khª`^mfqîª^pªqebªì^fjªebia _vªqebªltkbopªlcªqebª_^khªtelªe^sbª`lkqoliªlsboªqebª_^khÖpªlmbo^qflkp+ >odr^_iv)ªev_ofaªì^fjpªprèª^pªmobcboobaªpeôbpªloªpr_loafk^qbaªab_qªalªklq nrîfcvª^pª_^khª`^mfqîªrkaboªqefpªpb`lkaªklqflkªlcª_^khª`^mfqî)ª^pªqebvª`^kª_b pbbkª^pªgrkfloªclojpªlcªab_q+ªTebkªqebª_^khªe^pªqllªifqqibª`^mfqîªfkªqefpªpb`lka pbkpb)ªqebªltkbopÖªfk`bkqfsbpªobcib`qªqebfoªefdeivªibsbo^dbaª_î^k`bªpebbq+ªTebk c^`baªtfqeª^ªatfkaifkdªpq^hbªfkª^ªibsbo^dbaªbkqfqv )ªqebªltkbopªtfqeª`lkqoliªe^sb ifqqibªqlªilpb)ª^kaªbsbovqefkdªqlªd^fkª_vªbkd^dfkdªfkªofph*pefcqfkdª_bqpªlkªqebª_^kh+ Qebªfkòb^pbaªobmlªe^fo`rqªfjmlpbaª_vªqebª`^mfqîªjôhbqªarofkdªafpqobppªbmfplabp `lriaª_bªpbbkª^pªqebªfkòb^pbaªjôdfkªabj^kabaª_vªòbafqlopªfkªqebª`^mfqîªjô * hbqªqlªè^kdbaª`fo`rjpq^k`bp+ªª Qebªhbvªmlfkqªfpªqe^qªqebªobmlªe^fo `rqª^kaªqebªfjmifbaªjûfjrjªibsbo^dbªfpª^ `lkpqo^fkqªfjmlpbaª_vªqebª`^mfqîªjôhbq)ª^kaªobcib`qpªqebªqbojpªlkªtefèªòbaf * qlopªôbªtfiifkdªqlªibkaªqlªqelpbªtfqeª`lkqoliªlsboªqebªibsbo^dbaªbkqfqv +ªLkbªmi^r* pf_ibªè^kkbiªqeolrdeªtefèªqebª`lkpqo^fkqªlmbo^qbpªfpªqebªtfpeª_vªòbafqlopªql ^slfaª_bfkdªbj_olfibaªfkª^ªibkdqevª^kaª`lpqivª_^khormq`vªpbqqibjbkqª^cqboªqeb _looltboªe^pªabc^riqba+ªTebkª^ª_^khª_ob^èbpªqebªjûfjrjªibsbo^dbªo^qflªmbo * jfqqbaª_vªqebªjôhbq)ªqebª_^khªjrpqªq^hbªobjbafîª^`qflkªqlªobar`bªfqpªibsbo^db) loªc^`bª^ªorkª_vªfqpªòbafqlop+ªª KloqebokªOl`hÖpªabjfpbªfiirpqo^qbpªqebpbªfpprbpªpqôhiv +ªKloqebokªOl`hªt^pª^ efdeivªibsbo^dbaªfkpqfqrqflkªtebkª`lkpfabofkdªqebªibsbo^dbªlkª`ljjlkªbnrfqv+ªFqp efdeªibsbo^dbªjâbªfqªbpmb`fîivªsrikbo^_ibªqlª^ªabqboflo^qflkªfkªlsboîiªcrkafkd `lkafqflkpªcloªqebªcfk^k`fîªpvpqbjª^pª^ªtelib+ Cfdrobª4ªmilqpªqebªibsbo^dbªlcªKloqebokªOl`hªcoljªGrkbª.665ªqlªAb`bj_boª/--4) rpfkdªqeobbªafccbobkqªjb^probpªlcªbnrfqv +ª@ljjlkªbnrfqvªfpªqebªjlpqª_^pf`ªcloj lcªbnrfqvªåªfqªfpªqebªpq^hbªebiaª_vªqebªltkbopªlcªqebª_^khªtfqeªslqfkdªmltboª^ka ebk`bªtelªe^sbªqebªofdeqªqlªbubo `fpbª`lkqoliªlsboªqebª_^kh+ª]Peôbeliaboªbnrfqv$ fkªCfdrobª4ªfpªabcfkbaª^pª`ljjlkªbnrfqvªmirpªmobcboobaªpeôbp+ªCfkîiv)ª]qlqîªbnrf* qv$ªfkªCfdrobª4ªfpªpeôbeliaboªbnrfqvªmirpªpr_loafk^qbaªab_q)ª^ªì^ppªlcªab_qªqe^qªfp pbkfloªqlªqebª`ljjlkª^kaªmobcboobaªbnrfqv )ª_rqªtefèªfpªgrkfloªqlªlqeboªqvmbpªlc ab_qªq^hbkªlkª_vªqebª_^kh)ªfkìrafkdªabmlpfqp+ Cfdrobª4ªpeltpªsbovªbumif`fqivªeltªfjmloq^kqªfqªfpªqlª`î`ri^qbªqebªibsbo^dbªo^qfl tfqeª`ljjlkªbnrfqvªfkªqebªabkljfk^qlo +ªIbsbo^dbª_^pbaªlkªqlqîªbnrfqvªòb^qbp qebªcîpbªfjmobppflkªqe^qªKloqebokªOl`hªjfdeqªe^sbªklªafccf`riqvªoliifkdªlsboªfqp peloq*qbojªcrkafkd+ª 36 The Fundamental Principles of Financial Regulation Northern Rock's Leverage Figure 7 Northern Rock’s leverage, Juneune 1 1998998 - D e–c eDecembermber 2007 2007

70 Leverage on total equity 60 Leverage on shareholder equity Leverage on common equity 50

10 Jun-98 Dec-98 Jun-99 Dec-99 Jun-00 Dec-00 Jun-01 Dec-01 Jun-02 Dec-02 Jun-03 Dec-03 Jun-04 Dec-04 Jun-05 Dec-05 Jun-06 Dec-06 Jun-07 Dec-07

Source: Shin (2008).

4.6 Ladder of responses

Tfqeªobdôapªqlªqebªpb`lkaªj^fkªmofk`fmib)ªqe^qªobdri^qflkªpelriaª_bªjlpqª`lk * pqo^fkfkdªarofkdªòbafqª_lljp)ªtbªmolmlpbª^ªmolmlpbª^ªmoljmqª^kaªiâaboba obpmlkpbªtebkª^ªcfk^k`fîªfkpqfqrqflkªsfli^qbpªlroªjrèªjlobªpqofkdbkqª`^mfqî ^kaªifnrfafqvªobnrfobjbkqpªpqôqfkdª^qª^kªbôifboªpq^db+ªT bªcliiltªqebªpr``bppcri fjmibjbkq^qflkªlcª^ªiâabobaª^mmol^èªfkqolar`baª_vªqebªCAF@F>+ªCloªbu^jmib) tebkªqebª`^mfqîª^kaªifnrfafqvªobnrfobjbkqpªôb)ªp^vª."ª_biltªqôdbqªsîrb)ªprmbo* sfpflkª`lriaª_bªbke^k`ba+ªTebkªqebªqôdbqªfpªjfppbaª_vª/")ªqebªfkpqfqrqflkª`lria fkªâafqflkª_bªclo_faabkªqlªm^vªlrqªafsfabkapªloªj^hbªlqeboªclojpªlcªbnrfqvªm^v * lrqp+ª>ªjfppbaªqôdbqª_vª0"ªjfdeqªafpîiltª^kvª_lkrpªm^vjbkqpªqlªqebª@BLª^ka lqeboª_lôaªjbj_bop+ª>ªjfppª_vª1ª"ª`lriaªobnrfobªob`^mfqîfw^qflkªloªìlprobªtfqe* fkªqtlªjlkqep+ª

4.7 Forced debt-equity conversion

Ob`^mfqîfp^qflkªlcª_^khpªfkªqfjbpªlcªòfpfpªfpªlcqbkªafccf`riqª_b`^rpbª_^khpªprccbo coljª^ªab_q*lsboe^kdªmol_ibj+ªKbtªfksbpqlopªôbªrktfiifkdªqlªfkgb`qªkbtªbnrfqv ) pfk`bªqebªmofjô vª_bkbcf`fôfbpªlcªfqªtlriaª_bªbufpqfkdªab_qªeliabopª^kaªklqªqeb _^khªfqpbic+ªQ lªlsbo`ljbªqefpªmol_ibj)ªtbªmolmlpbªqe^qªqebªobdri^qlopªe^sbªqeb ^rqelofqvªqlª`lksboqªprèªbufpqfkdªab_qª^pª`lrkqpª^pªqfboª.ª^kaªqfboª/ª`^mfqîªfkql bnrfqv+ªQebª^fjªlcªqefpªqlliªfpªîibsf^qbª^ªpvpqbjf`ªòfpfpª^ka)ªebk`b)ªfqªpelriaªlkiv _bªfkslhbaªtebkªqebªtelibªloªmôqªlcªqebªcfk^k`fîªpb`qloªfpªfkªafccf`riqv +ª Counter-Cyclical Regulation 37

4.8 Clear incentives for regulators: rules versus discretion

Qebªqefoaªj^fkªmofk`fmibªqe^qªtbªmolmlpbªfpªqe^qªl_gb`qfsbªòfqbof^ª^kaªmob*pmb`f * cfbaªoribpªpelriaª_bªmrqªclo tôaªqlªdrô^kqbbªqe^qªcfk^k`fîªobdri^qflkªfpªpqof`qiv bkclo`ba+ªQlªbkprobªqe^qªqebªbkclo`bjbkqªlcªqebpbªoribpªfpªòbaf_ib)ªobdri^qlopªjrpq c^`bªqebªofdeqªfk`bkqfsbªpqor`qrob01 ^kaªbkglvª^ªabdobbªlcªfkabmbkabk`bªqe^qªîiltp qebjªqlªfjmlpbªmlqbkqfîivªrkmlmriôªpqbmp+ªTebkªbsbo vlkbªfpª`îifkdªcloªjlob obdri^qflk)ªb+d+)ª^pªklt)ªgrpqª^cqboª^ªòfpfp)ªfqªfpªklqªkbbabaª^qªîi)ªpfk`bª_^khªj^k * ^dbopªôbªqfjfaª^kaªofphª^sbopb+ªTebkªobdri^qflkªfp kbbaba)ªklªlkbªt^kqpªfq)ª_b`^rpb ^ppbqªmof`bpªôbªofpfkd)ªqebobªfpª^ª_llj)ªbsbo vlkbªfpªlmqfjfpqf`)ª^kaªobdri^qflkªgrpq dbqpªfkªqebªt^vª%pbbª>mmbkafuª>&+ª>ijlpqªbsbovªobdri^qlo,prmbosfploªtfiiªpbbhªjû* fjrjªafpòbqflk+ª?b`^rpbªlcªqebª^_lsbª`lkpfabo^qflkp)ªobdri^qflkªpelriaª_bª_^pba lkªmob*pbqªoribp8ªlqebotfpb)ªcbtªobdri^qlo,prmbosfplopªtfiiª^`qrîivªaôbªqlªc^`bªqeb lafrjªlcªqfdeqbkfkdªfkª_lljª`lkafqflkp+ªQebobªfpª^`qrîivªifqqibªqe^qªtbªôbªmol * mlpfkdªebobªqe^qªfkªmofk`fmibª^kaªfkªqeblo vª`lriaªklqªe^sbª_bbkª^``ljmifpeba rkaboªqebªafpòbqflkôvªMfiiôª/ªlcª?^pbiªFF+ªFkªmo^`qf`bªfqªt^pªklqªrpbaªqe^qªt^vª^q îi)ª^kaªmol_^_ivªkbsboªtlriaª_b+

4.9 Cross-country considerations

@lrkqbo`vìf`îªjb^probpªpelriaª_bª^mmifbaªlkª^ª`lrkqo v*_v*`lrkqovª_^pfp)ªpfk`b `vìbpªôbªklqªfabkqf`îª^kaªj^qèfkdª^òlppªîiªmôqpªlcªqebªtloia+ªQerpªDboj^kv ^kaªFqîvªafaªklqªpeôbªfkªqebªelrpfkdª`vìbªqe^qª^ccb`qbaªRP>)ªRH)ªPm^fk)ªbq`+ @obafqªbum^kpflkªqllhªmi^`bª^qª^ªsbo vªafccbobkqªm^`bªfkªsôflrpª`lrkqofbp+ªPlªtb `^kklq)ª^kaªpelriaªklq)ª^pªvbqªqîhª^_lrqª^ªtloiaª`vìb+ªEltbsbo )ªcloª`boq^fk obdflkp)ªklq^_ivªqebªbrol*ôb^)ª`lrkqofbpª`lriaª`lloafk^qbª`lrkqbo `vìf`îªjb^p* robpªlkª^ªtfaboªobdflkîª_^pfp+ªQerp)ªbsbkªqelrdeªqebª?^pbiªFFª_^pf`ª@>Opªôbªibsbi ^òlppª`lrkqofbp)ªqebª^`qrîªfkqbo^`qbaª`lrkqbo*`vìf`îª@>Opªtlriaª_b`ljbªefde * boªfkª`lrkqofbpªtfqeª^kª^ppbqª_lljª^kaªo^mfaªòbafqªbum^kpflk)ªqe^kªfkª`lrkqofbp klqªbuef_fqfkdªprèª`lkafqflkp+

4.10 Contrast to Spanish dynamic provision mechanism

Fqªj^vª_bªtloqetefibª`ljmôfkdª^kaª`lkqo^pqfkdªlroª^mmol^èªtfqeªqe^qªlcªqeb Pm^kfpeªmob*ª%loªavk^jf`&ªmolsfpflkfkdªjbè^kfpj+ 02 Qebvªôbªìlpbivªpfjfiôªfk fkqbkqª^kaª`lkpqor`qflk+ª?lqeªrpbªj^òl*morabkqfîªjb^probpªqlªfkqbo^`qªtfqeªmor* abkqfîªobnrfobjbkqp+ªT bªmrqªjlobªtbfdeqªlkªibsbo^dbªo^qflpª^kaªj^qrofqvªjfp * j^qè803 qebªPm^kfpeªmrqªjlobªtbfdeqªlkªòbafqªdoltqeª%`ljmôbaªqlªilkdbo*qboj ^sbo^dbªsîrbp&8ª_lqeªtlriaª^mmivªkrjbof`îª`lbccf`fbkqp)ªtefèªe^sbª_bbkªmob* pbq)ªqlªâgrpqªmorabkqfîªobnrfobjbkqpªqlªqebªobibs^kqªfkafsfarîª_^khp)ªfkìrafkd

01 Mboe^mpªtfqeªpîôfbpª%^kaªmbkpflkp&ªcloªpbkfloªlccf`fîpªfksbopbivªobi^qbaªqlªqebªjb^probaªmol_^_fifqv lcªabc^riqªlcªqebªiôdbpqªcfsbª_^khpªfkªqebª`lrkqo v< 02 LkªqebªPm^kfpeªmol`barobp)ªpbbªGfjbkbwª^kaªP^rofk^ª%/--3&ª^kaªabªIfp)ªbqªî)ª%/---&+ 03 Qebªa^kdboªlcªibsbo^dbªfpªdob^qbo)ªqebªtlopbªqebªjfpj^qèª_bqtbbkªcrkafkdª^kaª^ppbqªj^qrofqfbp+ Qebªtbfdeqªqlª_bªmi^`baªlkªibsbo^dbªo^qflpªfkªj^òl*morabkqfîª@>Opªpelriaªsô vªfksbopbivªtfqeªqeb abdobbªqlªtefèªlroªmolmlpîpªlkªIfnrfafqvª%@e^mqboª2&ªôbªâlmqba+ 38 The Fundamental Principles of Financial Regulation pr_pfafôfbpªlcªclobfdkª_^khpªfkªPm^fk+ªQebªPm^kfpeªpèbjbªobi^qbpªplibivªqlªòbafq doltqeª^kaªmolsfpflkpªfkªPm^fk+ªGrpqª^pªfkªqebª`^pbªlcªlroªmolmlpîp)ªfcªqebªPm^kfpe pèbjbªtbobª^mmifbaªjlobªtfabivªqlªlqeboª`lrkqofbp)ªfqpª^mmif`^qflkªtlriaªafccbo coljª`lrkqovªqlª`lrkqovªabmbkafkdªlkªqebªpq^qbªlcªqebª`vìbªfkªb^èª`lrkqo v+ >ª`ljmif`^qflkªlcªqebªPm^kfpeªmob*molsfpflkfkdªpèbjbªfpªqe^qªfqª^mmbôpªqlªork clriªlcªqebª^``lrkq^kqpª^kaªlcªFCOPª%^kaªqebªqûª^rqelofqfbp<&+ª>ªafpâs^kq^dbªlc lroªmolmlpîªfpªqe^q)ª_vªfkqbo^`qfkdª%k^qflkî&ªj^òl*morabkqfîªc^`qlopªtfqeªqeb ?^pbiªFFª@>O)ªfqªbkapªqebªpfkdibªibsbi*mi^vfkd*cfbiaªcloªòlpp*_loaboª`^mfqîªobnrfob * jbkqpª^ka)ªtfqeªqe^q)ªqebªpfjmif`fqvªlcªebâ*nrôqboªj^k^dbjbkqª^kaªlcªlsboîi `lkplifa^qflk,`lkqoliª_vªqebªeljbªobdri^qlo,prmbosfplo+ªRkaboªlroªmolmlpîªebob jrèªjlobª`lkqoliªtlriaªciltª_^`hªqlªb^èª%pvpqbjf`&ªpr_pfafô vª^kaªqlªfqpªelpq obdri^qlo+ Tefibªtbª^mmi^raªqebªmofk`fmibpªlcªPm^kfpeªmob*molsfpflkfkd)ªtbªalªklqªqefkh qe^qªfqpªnr^kqfq^qfsbªbccb`qªe^pª_bbkªqlªjlabo^qbªqebªòbafqª`vìbª_vª^pªjrèª^pªlro jbè^kfpjª`lria+ªKbsboqebibppªpelriaªqebªmolmlpîªlrqifkbaªebobª_bªobdôabaª^p qllªoâf`î)ªqebªrkfsbopîªâlmqflkªlcªqebªPm^kfpeªmob*molsfpflkfkdªpèbjbª%^ka qebªâgrpqjbkqªlcªFCOPªqlªîiltªqe^qªqlªl``ro&ªtlriaªobmobpbkqª]`lrkqbo*`vìf`î* ifqb+$

4.11 Conclusion

Qebªkbbaªfpªqlª^èfbsbª`lrkqbo*`vìf`îªobdri^qlo vªjbè^kfpj%p&+ªAbq^fipªlcªelt qefpªjfdeqª_bª^èfbsbaªôbªfjmloq^kq)ª_rqªpb`lkaô v+ªPljbªmo^`qfqflkbopªe^sb clrkaªlroªfkqbo*^`qfsbªmolmlpîpª`ljmibu)ª^kaªalr_qªtebqeboªqebpbª`lriaª_b jâbªlmbo^qflkî+ªFcªjlobªbccb`qfsbªîqbok^qfsbpª`lriaª_bªl_q^fkba)ªtbªtlriaª_b e^mmv+ª>pª@e^foj^kªAbkdªp^fa)ª]Qebª`lilroªlcªqebª`^qªfpªrkfjmloq^kq)ªplªilkdª^p fqª`^kª`^qèªjf`b+$ 5 Regulation of Liquidity and Maturity Mismatches

Tbªe^sbªôdrbaªfkªmobsflrpªPb`qflkpªqe^qªqebª`roobkqªmefilplmevªlcª_^khfkdªobd * ri^qflkªåªqe^qªvlrª`^kªj^hbªqebªpvpqbjªp^cb 04 _vªj^hfkdªfkafsfarîªfkpqfqrqflkp p^cbªåªfpª^kªrkp^qfpc^`qlo vª_^pfpªcloªfkprofkdªpvpqbjf`ªpq^_fifqv +ªLkbªlcªqebªmofk`f * mîªob^plkpªcloªobdri^qfkdª_^khp)ªlsboª^kaª^_lsbªqebªt^vªtbªobdri^qbªlqeboª_rpf * kbppbp)ªfpªqe^qªqebfoªfkqbo*obi^qflkpefmpªôbªprèªqe^qªqebªo^qflkîªobpmlkpbªlcªlkb morabkqªfkpqfqrqflkªqlª^kªrkbumb`qbaªilppªåª^ªobar`qflkªfkªibkafkdª^kaª^ªpîbªlc ^ppbqpªåªj^vªe^sbªpvpqbjf`ªfjmif`^qflkpªcloªlqeboªmorabkqªfkpqfqrqflkp+ªQebpbªpvp * qbjf`ªfjmif`^qflkpªôbª`ljmlrkabaª_vªeboafkdª_be^sflroª^kaªqebªrpbªlcª`lk * qbjmlo^kblrpªmof`bpªfkªjb^probpªlcª^ppbqªsîrbª^kaªofph)ª^pªafp`rppbaªfkª@e^mqbo 0+05 Fkª@e^mqboª/ªtbªfkaf`^qbaªqe^q)ªtefibªqoâfqflkîªsfbtpªlcªpvpqbjf`ªofphªôb _^pbaªlkª`lkq^dflrpª_^khªc^firob)ª^ªhbvª^sbkrbªqeolrdeªtefèªpvpqbjf`ªofphªciltp qla^vªfpªsf^ªcrkafkdªifnrfafqvª`lj_fkbaªtfqeªâsbopbª^ppbqªmof`bªjlsbjbkqpªarb qlªiltªjôhbqªifnrfafqv +06 Cloªbu^jmib)ªfqªfpªtloqeªobfqbo^qfkdªqe^qªfkªqebª`^pbªlc KloqebokªOl`h)ªIbej^kª?olqebopª^kaª?bôªPqbôkp)ªqebªc^firobªt^pªmob`fmfq^qbaª_v qebªfk^_fifqvªlcªqebpbªcfojpª%f&ªqlªoliiªlsboªqebfoªif^_fifqfbpª%crkafkdªfiifnrfafqv&ª^ka %ff&ªqlªpbiiªjloqd^dbªmolar`qpª^qªklk*cfobªpîb*mof`bpª%jôhbqªfiifnrfafqv&)ªo^qebo qe^kªqebfoªcfkafkdªqe^qªqebfoª_looltbopªafaªklqªm^vªrmª%òbafqªofph&+ªJloblsbo )ªqeb cobbwfkdªlcªqebªfkqbo_^khªjôhbq)ªqebª^ppbqª_^`hbaª`ljjbo `fîªm^mboªjôhbq)ª^ka lqeboªplro`bpªlcªcrkafkdªt^pªjlobªpvpqbjf`ªqe^kªpmb`fcf`ªqlª`boq^fkªfkpqfqrqflkp+ª Qefpªè^mqboªpbbhpªqlªabsbilmª^ªobdri^qlovª^mmol^èªqlªifnrfafqvªqe^qªj^vªj^hb pvpqbjf`ªifnrfafqvªbsbkqpªibppªcobnrbkqªloªpbsbob+ªJlobªpmb`fcf`îiv)ªtbªmolmlpbªqeb cliiltfkdªqtlªjb^probp7

Mark-to-funding accounting rule Mllipªlcª^ppbqpªcloªtefèªilkd*qbojªcrkafkdªfpªpb`robaª`^kª_bªmrqªfkª^ª]elia*ql* crkafkdª^``lrkq$ªifkhbaªqlªqebªj^qrofqvªlcªqebªcrkafkdª^kaªalªklqªe^sbªqlª_b jôhba*ql*jôhbq+ªT bª_bifbsbªqefpªtfiiªebimªqlªobar`bªqebªjôhbqªfiifnrfafqv `^rpbaª_vª^ªclo `baªpîbªlcª^ppbqpªqe^qªe^pªklªlqeboªjlqfs^qflkªqe^kªqebªsîrb ^``lrkqfkdªpq^kaôa+ª

04 Cloª^ªjlobªabq^fibaªbumi^k^qflkªlcªqefpª^ppbppjbkqªlcªqebª`roobkqª^mmol^`eªqlªobdri^qflkªpbbªKrdbb ^kaªMbop^raª%/--3&+ 05 PbbªMbop^raª%/---&+ 06 Pbbª?orkkbojbfboª^kaªMbabopbkª%/--6&+

39 40 The Fundamental Principles of Financial Regulation

Explicit capital charge for liquidity risk Cfk^k`fîªfkpqfqrqflkpªtelªeliaª^ppbqpªtfqeªiltªjôhbqªifnrfafqvª^kaªilkd*j^qrof* qvª^kaªcrkaªqebjªtfqeªpeloq*j^qrofqvª^ppbqpªpelriaªfk`roª^ªefdeboª`^mfqîªèôdb+ Tbª_bifbsbªqefpªtfiiªfkqbokîfpbªqebªpvpqbjf`ªofphpªqebpbªjfp*j^qèbpª`^rpbª^ka fk`bkqfsbª_^khpªqlªobar`bªcrkafkdªifnrfafqvªofph+ªPmb`fîªbjme^pfpªpelriaª_bªdfsbk qlªqebªpvpqbjf`ª`ljmlkbkq)ªb+d+ªqlªqebªc^`qªqe^qªjôhbqªifnrfafqvª^qªqfjbpªlcªòfpfp fpªilt+

?bclobªbumi^fkfkdªqebªpmb`fcf`pªlcªqebpbªqtlªpbmô^qbª_rqªobi^qbaªmolmlpîp)ªtbªlrq* ifkbªtevªfqªfpªfkâbnr^qbªplibivªqlª`lkpfaboªqebªm^vlccªnrîfqvªlcª^ppbqpª^kaªbppbk * qfîªqlª`lkpfaboªifnrfafqvª^pmb`qp+

5.1 Focusing solely on assets' expected payoffs is insufficient

Tbªôdrbªqe^qªcl`rpfkdªbuìrpfsbivªlkªqebªnrîfqvªlcª^ª_^khÖpª^ppbqªmloqcliflªfp fkprccf`fbkq)ªbsbkªqelrdeªqebª_^khÖpª^ppbqªnrîfqvª^kaªfqpª^_fifqvªqlª^``bppªcrkafkd ifnrfafqvªôbªobi^qba+ªEfpqlof`îiv )ª_^khªprmbo sfplopªelmbaªqe^qªqefpªobi^qflkpefm tlriaª_bªpqolkdªbklrdeªqlªj^hbª`^mfqîªâbnr^`vªobnrfobjbkqpªprccf`fbkqªclo abîfkdªtfqeªqebªfpprbªlcªifnrfafqv+1- Fcªqebobªeâª_bbkªifqqibªalr_qª^_lrqªqebªnrî * fqvªlcª^ppbqp)ª^ªifnrfafqvªòfpfpªjfdeqªklqªe^sbªbjbodba+ªEltbsbo)ªfqªpbbjpªîplªifhb* ivªqe^qªqebªòfpfpªtlriaªe^sbª_bbkªjlobªjlabpqªfkªqebªcfopqªfkpq^k`bª^kaªmlqbk * qfîivªjlobª`lkq^fk^_ibªfcªqebªp^jbª^ppbqpªeâª_bbkªcrkabaªtfqeªilkdbo*qbojªif^ * _fifqfbp+ª>ppbqpªtlriaªklqªe^sbª_bbkªpliaªfkªafpqobppbaªc^peflkªfkªprèª^kªbksfolk* jbkq)ªmof`bpªjfdeqªklqªqebkªe^sbª`lii^mpbaªplªcôª^kaªqebªcbba_^`hª`vìbªlcªmof`bp ^kaªofphªjfdeqªe^sbª_bbkªtb^hbo+ª

5.2 Funding liquidity and maturity mismatch

Qebªcfk^k`fîªpvpqbjÖpªobif^k`bªlkªpeloq*qbojªcrkafkdªlcªilkd*qbojª^ppbqpªtfqe mlqbkqfîivªiltªjôhbqªifnrfafqvªe^pª_bbkªqebªj^fkªplro`bªlcªfkpq^_fifqvªfkªqefpª^ka mobsflrpªcfk^k`fîªòfpbp+ªLkbªlcªqebªjlpqªòfqf`îªibpplkpªlcªqefpªòfpfpªfpªqe^q)ªtefib obdri^qlopªe^sbª_bbkªcl`rpbaªlkª^ppbqªnrîfqv)ªpvpqbjf`ªofphªe^pª^pªjrèªqlªalªtfqe eltª^ppbqpªôbªcrkaba+1. Fcªqtlªfkpqfqrqflkpªe^sbªqebªp^jbª^ppbq)ª_rqªlkbªcrkapªtfqe ilkd*qbojªab_qª^kaªqebªlqeboª_vª_looltfkdªlsbokfdeqªcoljªqebªjlkbvªjôhbqp) qebobªfpª^ª^ªpr_pq^kqfîªafccbobk`bªqlªqebªmlqbkqfîªcloªpvpqbjf`ªofph+ªVbqª`roobkqªobd* ri^qlovªoribpªj^hbªifqqibªafpqfk`qflkª_bqtbbkªeltªqebªp^jbª^ppbqpªôbªcrkaba+ªQeb ^_pbk`bªlcªafpqfk`qflkªdfsbpª_^khpª^kªfk`bkqfsbªqlªcrkaª^ppbqpªpeloq*qboj+ªQefp fk`bkqfsbªfpªjlpqªmolklrk`baªtebkªqebªvfbiaª`ro sbªfpªrmtôaªpilmfkd)ª^pªfpªlcqbk

1- Fkªqebªcfopqªjbbqfkdªlcªqebª?^pibª@ljjfqqbbªlcª?^khªPrmbo sfplopª%?@?P&ªfkªCb_orôvª.642)ªqeb @e^foj^kªDblodbª?irkabk)ªp^faªÖ*ªqebª@ljjfqqbbÖpªj^fkªl_gb`qfsbªt^pªqlªebimªbkprobª_^khªplisbk * `vª^kaªifnrfafqvÖ+ª"Coljªqebªlrqpbq)ªqebª?@?Pª^mmob`f^qbaªqe^qªplisbk`vª^kaªifnrfafqvªtbobªfkqbo* obi^qba8ª_lqeªtbobªbppbkqfîªcloªqebªpq^_fifqvª^kaªpro sfsîªlcª^ª_^khfkdªpvpqbj+ª>kªfiifnrfaª_^khª%pvp * qbj&ªtlriaªklqªobj^fkªplisbkqªcloªilkd)ªkloª^kªfkplisbkqª_^khª%pvpqbj&ªobj^fkªifnrfa")ª@+ª>+ªB+ Dllaeôq)ªfkª^ªcloqe`ljfkdªslirjbªlkªqebªbôivªefpqlo vªlcªqebª?^pbiª@ljjfqqbbªlkª?^khfkd Prmbosfpflk 1. Jrèªlcªqefpªôdrjbkqªt^pªclobpeâltbaªfkªOlekboª^kaªPebmebôa*T îtvkª%/---&)ªbpmb`fîivªqeb m^pp^dbªfkªPb`qflkª1ªlkªÖQebªfkqbo^`qflkª_bqtbbkª`^mfqîª^kaªifnrfafqvªj^k^dbjbkqÖ+ Regulation of Liquidity and Maturity Mismatches 41 qebª`^pbªfkª^ª_llj)ª^kaªpeloq*qbojªcrkafkdªfpªèb^mboªqe^kªilkd*qbojªcrkafkd+ Qebobªt^pª^ª`liib`qfsbªobif^k`bªlkªpeloq*qboj)ªtelibpîbªjôhbqªcrkapªfkªqebªork* rmªqlªqebª/--4ªò^pe+ 1/ Fpªj^qrofqvªjfpj^qèª^kªfkbsfq^_ibªcb^qrobªlcª^ªmofs^qbª_^khfkdªpvpqbj<ª>cqbo îi)ªfpªklqª_^khfkdªîiª^_lrqª_looltfkdªpeloqª^kaªibkafkdªilkd<ªKlqªkb`bppôfiv + Qebobªôbªj^kvª`^sb^qpªqlªqe^qªdbkboîfw^qflk)ª^kaªfqªfpªîplª^ªj^qqboªlcªabdobb+ Pjîiª_rpfkbppªtfiiª`ljmi^fkªqe^q)ªdfsbkªqebªlkbolrpª`lsbk^kqpªlkª_^khªil^kp) qebvªalªklqªcbbiªqe^qªqebvªe^sbª_looltbaªilkd*qbojªcoljª_^khp+ª>kaªfqªfpªlcqbk p^faªqe^qªabmlpfqlopªôbªjlobªifhbivªqlªe^sbªafslo`baªqebfoªpmlrpbªqe^kªib^sbªqebfo _^kh+ªObq^fiªabj^kaªabmlpfqpªôbªklqª^pªfkpq^kqª^pªqebvª^mmbô 10+ªQebªbsbo*abìfk* fkdªo^qflªlcªmofs^qbªpb`qloªaljbpqf`ªabmlpfqpªqlªqlqîªif^_fifqfbp)ª^pª_^khpªfkòb^p * fkdivªobifbaªlkªpeloq*qbojªtelibpîbªabmlpfqpªfkªqebªorkªrmªqlªqebªò^peªlcª/--4) t^pªlkbªjb^probªlcªfkòb^pfkdªcrkafkdªifnrfafqvªofphª^jlkdpqª_^khp+ªBccb`qfsbiv ) _^khpÖªj^qrofqvªjfpj^qèªdlqªtlopbªqeolrdeªtelibpîbªcfk^k`fkd+

5.3 Mark-to-funding – a new accounting rule

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1/ Jrèªlcªqefpªôdrjbkqªt^pªclobpeâltbaªfkªOlekboª^kaªPebmebôa*T îtvkª%/---&)ªbpmb`fîivªqeb m^pp^dbªfkªPb`qflkª1ªlkªÖQebªfkqbo^`qflkª_bqtbbkª`^mfqîª^kaªifnrfafqvªj^k^dbjbkqÖ+ 10 >kªâabaªpvpqbjf`ªofphªfkªqebªRHª`^pbªt^pªqe^qª^ªpfdkfcf`^kqª^jlrkqªlcªtelibpîbªcrkafkdªt^p buqbokîªqlªqebªRH+ªTebkªqebªòfpfpªefq)ªqebobªt^pª^ª]praabkªpqlm$ª^kaªifqqbiªobqrokªlcªqefpªplro `bªlc crkafkd+ 11 >iqelrdeªcfk^k`fîªpq^_fifqvª`lk`bokpªôbªkltªmô^jlrkq)ªtebkªtbªdbqªlrqªlcªqebªòfpfpªfksbpqlo molqb`qflkª`lk`bokpªtfiiªobproc^`b+ªªPlªtbªpelriaªklqªqefkhªqe^qªtbª`lriaªe^sbª^``lrkqfkdªmofk`f * mibpªcloªqebªcfk^k`fîªpb`qloªafccbobkqªcoljªqelpbª^mmifbaªqlªqebªklk*cfk^k`fîªpb`qlop+ªª>pªqebªS f`b* MobpfabkqªlcªqebªPm^kfpeªPB@)ªC+ªObpqlv)ªªpq^qbaª%/--5&)ª"Rpfkdªmorabkqfîªmlif`vªqllipªtlriaªpbbjª^ jlobªbccf`fbkqªt^vªqlªâaobppªcfk^k`fîªpq^_fifqvª`lk`bokpªqe^kªafpqloqfkdªqebªòfqbof^ªrpbaªqlªobmloq cfk^k`fîªfkcloj^qflk+"ªªTbªqe^khªO^c^biªObmriilªcloªqefpªobcbobk`b+ 42 The Fundamental Principles of Financial Regulation

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12 PbbªMbop^raª%/--5^)ª/--5`&+ Regulation of Liquidity and Maturity Mismatches 43

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Box 1 contd.

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Assets Liabilities

1 .-- n

o 0 i t a r u / D

. A B C D

- 2- Share of portfolios

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Fkª^ªpbkpbªte^qªqefpªmolmlpîªalbpªfpªqlªîiltª^kvª_^khªfkª^ªifnrfafqvªòfpfpªqlªpbq rmªfqpªltkªfkqbokîªÖ_âª_^khÖªjbè^kfpjªplªilkdª^pªfqªe^pªprccf`fbkqªilkdªqboj crkafkdªqlªprmmloqªqe^q+ªªQebªkbbaªcloªprèª^ªjbè^kfpjªpelriaªlkivª_bªl``^ * pflkî)ª_rqª^ª_bkbcfqªlcªalfkdªqefpªfpªqe^qªfqªpelriaªmolsfabª^kªâafqflkîªfk`bk * qfsbªcloª_^khpªqlªpbbhªlrqªâafqflkîªilkdboªqbojªcrkafkdªfkªklojîªqfjbp+

Prèª^ª`ôsbªlrqª`lriaª_bªlmbo^qbaªcibuf_ivªtfqeªklªifjfqªlkªqebªrpbªlcª^ppbqpªlo if^_fifqfbpª^ppfdkbaªqlªfq)ªtefèª`lriaªsô vªlsboªqfjb+ªªOb`îiªqe^qªqebªbubo `fpb tlriaªlkivª`ljbªfkqlªlmbo^qflkªtebkªqebªM +S+ªlcªbumb`qbaª`^peªciltpªt^pªpfd * kfcf`^kqivªdob^qboªqe^kªqebª`roobkqªjôhbqªsîrbªlcªqebª^ppbqpªfkslisba+ª?rq+++ª Regulation of Liquidity and Maturity Mismatches 45

Box 1 contd.

+++prèª^ªjbè^kfpjªjfdeqªe^sbª_bbkªsbovª_bkbcf`fîªqlªprèª_^khpª^pªeâª^ªprc* cf`fbk`vªlcªilkdboªa^qbaªif^_fifqfbpªfkªqebªob`bkqªòfpfp+

Fkªdbkboî)ªqebª`roobkqªsîrbª^``lrkqfkdªpvpqbjªafp`lro^dbpª_^khpªcoljªilkd* qbojªcrkafkd+ªQebªobtôaªqlª^ª_^khªlcªibkdqebkfkdªqebªj^qrofqvªlcªfqpªcrkafkd fpªqe^qªfqªmolsfabpªdob^qboªqfjbªtfqeªtefèªqlªafsbopfcvªofphp+ª?rqªqefpªfpªilpqªfc ^ppbqpªôbªsîrbaª^pªfcªqebvªtbobªqlª_bªpliaªqljloolt +ªFqªpelriaª_bªklªpromofpb qe^qª_^khpªe^sbªobpmlkabaª_vªobivfkdªlkªèb^mboªpeloq*qbojªcrkafkd)ª_rqª^pªtb e^sbªafp`rppbaª^_lsb)ªqefpªfpªofphvª_lqeªcoljªqebªmbopmb`qfsbªlcª^kªfkafsfarî _^khª^kaªlcªqebªcfk^k`fîªpvpqbj+ªJôh*ql*crkafkdªtlriaªbk^_ibª_^khpªqlª`^m * qrobªqebªobar`qflkªlcªofphª^ppl`f^qbaªtfqeªilkdbo*qbojªcrkafkdª^kaªtlria objlsbªqefpªôqfcf`fîªafpfk`bkqfsb+ªLroªmolmlpîªqlªèôdbª`^mfqîªcloªpfdkfcf`^kq j^qrofqvªjfpj^qèbpªfkªqebªcrkafkdªlcªilkd*qbojª^ppbqpªpelriaªîplª^rdjbkq qefp+ªTebobª_^khpªe^sbªilkd*qbojªcrkafkd)ªjôh*ql*crkafkdªtlriaªîiltªqebj qlªobcib`qªqebªobîªofphpªc^`fkdªqebj)ª^kaªklqªqlªâaªqlªqebfoªltkª^kaªpvpqbjf` ofphpª_vªclo`fkdªqebjªqlª_be^sbª^pªfcªqebvª^`qrîivªe^sbªpeloq*qbojªcrkafkd+ªFk qefpªobdôa)ªjôh*ql*crkafkdªfpªfkªqebªpmfofqªlcª^ªqorbª^kaªc^foªobcib`qflkªlcªqeb cfk^k`fîª`lkafqflkpªc^`fkdª^ª_^kh+ crkafkdª^kaªofphªqoâbop+ªOfphªqoâbopªôbªqelpbªtfqeªifjfqbaª`^m^`fqvªqlªafsbopfcv ofphpªqeolrdeªqfjbª_b`^rpbªlcªqebfoª`^mfqîªloªcrkafkdª^kaªtelpbªofphªj^k^dbjbkq pqo^qbdvªfp)ªbccb`qfsbiv)ªqlªobar`bªofphpªtebkªqebvªofpbª_vªpbiifkdªqebjªlkªqlªpljb * lkbªbipbªobar`baª%pbbªMbop^ra)ª/--5_&+ Pljbªtloovª^_lrqªqebªp^jbª^ppbqª_bfkdªsîrbaªafccbobkqivª_vªafccbobkqªfkpqfqr * qflkp+ªLcª`lropbªqefpªfpªîobâvªalkbªtfqefkªqebªcfk^k`fîªpb`qloª^pª^ªtelib+ªQebob ôbª^ppbqpªebiaª_vªfkpro^k`bª`ljm^kfbpªqe^qªôbªsîrbaªlkª^ªelia*ql*j^qrofqvª_^pfp qe^qªôbªîplªebiaª_vª_^khpª^kaªsîrbaªlkª^ªjôh*ql*jôhbqª_^pfpª^kaª^``bmqba ob^plkfkdªfpªqe^qª^kªfkpro^k`bª`ljm^kvÖpªif^_fifqfbpªôbªilkdbo*qboj+ªJôh*ql*crka* fkdªjbobivªbuqbkapª^kaªobfkclo`bpªqefpª^mmol^èªîlkdªibppªâªel`ªifkbpªqe^kªfpª`ro* obkqivªqebª`^pbªtfqeª]Ibsbiª0$ª^ppbqpªloª^ppbqpª`roobkqivªebiaªfkªklk*jôh*ql*jô * hbqªobdfjbpªjlobªdbkboîiv+ª Ibqªrpª`lkìrabªlroªafp`rppflkªlkªjôh*ql*crkafkdªtfqeªqtlª`^sb^qp+ªCfopq) tefibªjôh*ql*crkafkdªtfiiªobar`bªqebªabdobbªlcªjôhbqªfiifnrfafqvª`^rpbaª_v clo`baªpîbpªqe^qªtlriaªklqªe^sbªl``roobaªtbobªfqªklqªcloª^ªsîr^qflkª^kaªofphªelof* wlkªqe^qªfpªklqªobibs^kqªqlªqebª^ppbqªeliafkd)ªtbªôbª^tôbªqe^qªjlpqª_^khpªôbªfk c^`qªcrkabaªlsboªqebªpeloq*qboj+ªLcª`lropb)ªqebªâlmqflkªlcªjôh*ql*crkafkdªj^v îplªbk`lro^dbªcfk^k`fîªfkpqfqrqflkpªtfqeªilkd*qbojªcrkafkdªqlª_bª_rvbopªlcªafp * qobppbaª^ppbqp)ªtefèªtfiiªîplªprmmloqªjôhbqªifnrfafqv +ª Qebªpb`lkaª`^sb^qªfpªqe^qªîiltfkdª]elia*ql*crkafkdª^``lrkq$ªdo^kqpªcfk^k`fî fkpqfqrqflkpªpljbªafpòbqflkªeltªqlªsîrbª^ppbqp+ªQefpªfkqolar`bpªâafqflkîª^pvj* jbqof`ªfkcloj^qflkª^kaªjfdeqªefkaboªcrqrobªcrkafkd+ªQebobªôbªqelpbªtelªôdrb qe^qªc^foªsîrbª^``lrkqfkdªfpª^pªô_fqoô vª^ªsîr^qflkªlcª^ªilkd*qbojª^ppbq)ª%loªif^ * _fifqfbp8ªj^kvªcbbiªrk`ljcloq^_ibªtebkª^ª_^khªobar`bpªilppbp,o^fpbpªmolcfqpª_vªtofq* fkdªaltkªqebªsîrbªlcªfqpªprmmlpbaivªmô*sîrbªif^_fifqfbpª_b`^rpbªòbafqªofphªibâp qebjªqlª_bªqoâbaª^qª^ªafp`lrkq)ªpbbª^jlkdpqªlqebop)ª?rfqboª/--6&)ª^pª^kvªlqebo ) _rqªqlªlsbo`ljbªqebª^pvjjbqof`ªfkcloj^qflkªmol_ibjªtbªtlriaªob`ljjbkaªqe^q 46 The Fundamental Principles of Financial Regulation tebobª^ppbqpªôbªklqªsîrbaªlkª^ªjôh*ql*jôhbqª_^pfp)ªqebvªtfiiªe^sbªqlª_bªsîrba _vª^ªqefoaªmôqvª^kaªtbªtlriaªîplªpr_pòf_bªqlª>iibkª^kaª@ôibqqfª%/--5&ªmolmlp * îªqe^qªb^èªcfk^k`fîªfkpqfqrqflkªpelriaªmr_ifpeªqtlª_î^k`bªpebbqp7ªlkbª_^pbaªlk jôh*ql*crkafkdª^kaª^klqeboªlkbª_^pbaªlkªjôh*ql*jôhbqªbsîr^qflkp+ª

5.4 Capital charges against illiquidity

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`rq+ª>ppbqpªqe^qªôbª^``bmqbaª_vªqebª`bkqoîª_^kh ^pª`lii^qboîªcloªil^kpªtfqelrqª^ªpfdkfcf`^kqªe^foª`rqªtlriaªe^sbª^kª^ppbqªj^qrofqv lcªibppªqe^kªlkbªa^v+ªLkbªjlkqeªil^kpªe^sbª^kª^ppbqªj^qrofqvªlcª^ªjlkqeªloªibpp+ª Qebªmol_ibjªfpª^ppbppfkdªqebªbccb`qfsbªj^qrofqvªcloªilkd*qbojªil^kpªqe^qªôbªklq %klojîiv&ªbifdf_ibª^pª`lii^qboîª^qªqebª`bkqoîª_^kh+ªFkªqebª`roobkqªpqobppbaªbksf * olkjbkq)ª^ppbqpªqe^qªtbobªmobsflrpivª`lkpfabobaªefdeivªifnrfaªôbª_bfkdªpliaªtfqe iôdbªe^fo`rqp+ªFkªqebª`fo`rjpq^k`bpªtbobªqebªj^qrofqvªlcªil^kpªôbªfkªbu`bppªlcªqtl vbôp)ªprmbosfplopª`^kª^mmivª^ªabc^riqªo^kdbªlcª./ªqlª/1ªjlkqepª^kaªobnrfobª_^khp qlªmrqª2-"ªlcªqebfoª^ppbqpªfkª^ª./ªjlkqeª_r`hbqª^kaª2-"ªfkª^ª/1ªjlkqeª_r`hbqªql _bªobsfbtbaªmboflaf`îiv+ªFcªtbªeâªklqªmobsflrpivªmolmlpbaª`lrkqbo*`vìf`îªjri * qfmibpªqlªqebªbufpqfkdª`^mfqîªèôdbª%pbbªPb`qflkª1&ªtbªtlriaªîplªob`ljjbkaªobd* ri^qlopªqlªo^fpbªqebªmolmloqflkªlcª^ppbqpªebiaªfkªqebª/1ªjlkqeª_r`hbqªfkª^ªjbqela* 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13 Fqªpelriaª_bªklqbaªqe^qªtebobª_^khpªe^sbª^qqo^`qbaªabmlpfqpªqeolrdeª^_lsbªklojîªfkqbobpqªo^qbp) qebvª^mmbôªqlªe^sbª`^mqrobaªqebªjlobªcllqillpbªabmlpfqlopªtelªôbªnrf`hboªqlªabmôqª^qªqebªcfopq pfdeqªlcªqolr_ib+ªMboe^mpª^ªjb^probªlcªqebªilkdbsfqvªlcªqebªabmlpfqªfpªeltªmlloªqebª`ljmbqfqfsb fkqbobpqªo^qbªfp)ª^ªAfsfpf^ª^mmol^è+ 14 Cloª^ppbqpªlqeboªqe^kªil^kpªtbªjb^probªjb^probaª^pªqebª^sbo^dbªqfjbªfqªq^hbpªqlª_bªm^faª_^`hªqeb `roobkqªsîrbªlcªqebª^ppbq+ 48 The Fundamental Principles of Financial Regulation

Qebª`roobkqªòfpfpªfkbsfq^_ivª`îf_o^qbpªlroªpbkpbªlcªte^qªfpª^kªâbnr^qbªabdobbªlc p^cbqv+ªQbkªvbôpª^dl)ªbkprofkdªqe^qªcrkafkdªj^qrofqfbpªtlriaªîiltªfkpqfqrqflkpªql prosfsbª^ªcbtªtbbhpªfkªqebªc^`bªlcª^ªafpormqflkªqlªjlkbvªjôhbqpªt^pª`lkpfaboba âbnr^qb+ªFkªqebª/--4*-5ªòfpfp)ªtelibpîbªjlkbvªjôhbqpªe^sbª_bbkªjlobªloªibpp ìlpbaªcloªj^kvª_looltbopªcloªlsboª^ªvbô + Cfkîiv)ªb^èª_^khª`^kª`î`ri^qbªfqpªbccb`qfsbªj^qrofqvªjfpj^qèªcloªqebªtelib _î^k`bªpebbqªloªîplªcloªpbsboîªpr_mllip+ªQe^qªfp)ª`^mfqîª`lriaª_bª^ppbppbaª^d^fkpq mllipªlcª^ppbqpªqe^qªe^sbª_bbkª^ppfdkbaªqlªmllipªlcªcrkafkd)ª^pªabpòf_baªfkª?lu 2+.+ªQebª^ppfdkjbkqªlcªmllipªlcªcrkafkdª`^kª_bªè^kdbaª^pªilkdª^pªqebª`^mfqî obnrfobjbkqªfpªqebkªob*^ppbppba+ªFqªfpª_bqqboªqlªîiltª_^khpªqlªclojªmllipªbumif`fq * ivªlkªqebfoª_î^k`b*pebbqpªo^qeboªqe^kªdfsbªqebjªqebªfk`bkqfsbpªqlªalªfqªsf^ªlcc*_î* ^k`bªpebbqªsbefìbp+ª Tbªob`ldkfpbªqe^qªbpqfj^qfkdªqefpªifnrfafqvªjriqfmibª^mmbôpªâªel`+ªTe^qªfp obnrfoba)ª^kaªte^qªtbªe^sbªqofbaªqlªj^mªlrq)ªfpª^ªco^jbtlohªcloª^ppbppfkdªqebªifn * rfafqvªofphª%qebªbccb`qfsbªj^qrofqvªjfp*j^qèªlcªmllipªlcª^ppbqpª^kaª`loobpmlkafkd mllipªlcªcrkafkd&+ªFqªe^pª_bbkªprddbpqbaªqe^qªifnrfafqvª_rccbopªtlriaª_bªpfjmibo ^kaªqebvªalª^mmbôªpl)ª_rqªlkivª_vªj^hfkdªqebª`îf_o^qflkªmol`bppªjlobªpr_gb` * qfsbªqe^kªtbªe^sbªalkbªebob+ª >pªît^vpªfkªobdri^qflk)ªqebobªôbªfpprbpªqlª_bªc^`baª`lk`bokfkdªeljb,elpq obpmlkpf_fifqfbp+ªQoâfqflkîivªobdri^qflkªlcªifnrfafqvªe^pª_bbkªqebªobpmlkpf_fifqvªlc qebªelpqª`lrkqov)ª^qªib^pqªfkªqebª`^pbªlcªpr_pfafôfbp+ªPr_pfafôfbpª`^k)ª^kaªal)ª^mmiv qlªqebªelpqª`lrkqovª`bkqoîª_^khªcloªifnrfafqvª^ppfpq^k`b+ªLkªqebªlqeboªe^ka)ª`bk * qoîfp^qflkªlcª%^kaªb`lkljfpfkdªlk&ªifnrfaª^ppbqpªe^pª_bbkª^ªhbvª^pmb`qªlcªòlpp* _loaboª_^khfkd+ªQe^qª`lkcif`qªlcªfkqbobpqªt^p)ªrkqfiªob`bkqiv )ª`^jlrci^dbaª_vªqeb tfiifkdkbppªlcªobdri^qlopªqlªafpmbkpbªtfqeª`lkqolipªlsboªifnrfafqv + ?rqªkltªqe^qª`lkcif`qªfpªobproc^`fkd)ªcloªbu^jmibªfkªqebªCP>Öpªobnrfobjbkqªfkªqeb RHªqe^qªîiª_^khp)ªfkìrafkdªclobfdk*ltkbaªpr_pfafôfbp)ªeliaªpmb`fcfbaªo^qflpªlc ?ofqfpeªmr_if`ªpb`qloªab_q+ªTbªtlriaªmolmlpbªobi^qfkdªprèªifnrfafqvªo^qflpªlkivªql qelpbªclobfdk*ltkbaªpr_pfafôfbpªabpfdk^qbaª^pªÖpvpqbjf`Öª%pbbªPb`qflkª0&+ª?bvlka qe^q)ªtbªtlriaªprddbpqªqe^q)ªtebob^pªqebªelpqª`lrkqovªobq^fkpªqebªmofjbªobpmlkpf* _fifqvªcloªifnrfafqvªobnrfobjbkqp)ªqefpª`^k)ª^kaªpelria)ª_bªjlafcfbaª_vª_fi^qboî)ªlo jriqf*i^qboîªJLRp)ªmboe^mpªfkªBrolmbªqeolrdeªqebªdllaªlccf`bpªlcª@B?P+ 6 Other Regulatory Issues

6.1 Introduction

@^mfqîª^kaªifnrfafqvªobnrfobjbkqpªôbªqebªj^fkªpq^mibªlcªcfk^k`fîªobdri^qflk+ Kbsboqebibppªqebobªôbª^ªkrj_boªlcªlqeboªfpprbpªqe^qªkbbaªpljbªafp`rppflk)ªqelrde fkªpljbª`^pbpªlkivª_ofbciv+ >ªj^gloªcl`rpªlcªmr_if`ª^kdboªe^pª_bbkªqebªerdbªobjrkbo^qflkªlcªpbkfloª_^kh * fkdªlccf`fîp)ªtelªkltª^mmbôªqlªe^sbªob^mbaªfk^mmolmof^qbªmb`rkfôvª_bkbcfqpªclo q^hfkdªofphpªqe^qªlqebopªe^sbªbkabaªrmªpelriabofkd+ªJloblsbo)ªafaªqebªpqor`qrobªlc prèª^ªobtôaªpvpqbjªfqpbicªfkar`bªqebpbªp^jbªbub`rqfsbpªhkltfkdivªqlªq^hb bke^k`baªofph<ªTbªafp`rppªqefpªfkªpr_*pb`qflkª3+/+ Qebª_llj*_rpqª`vìbªfkªqebªelrpfkdªjôhbqªe^pª_bbkªìlpbivª^ppl`f^qbaªtfqe qebªòbafqª`vìbª^jlkdpqªqebª_^khp+ªFkªpr_*pb`qflkª3+0ªtbª^phªtebqeboª^klqebo fkpqorjbkqªqe^qªqebª^rqelofqfbpªjfdeqªrpbªqlªa^jmbkªaltkªprèª`vìbpª`lriaª_b %`lrkqbo*`vìf`î&ªsôf^qflkpªfkªIl^k*ql*Sîrbª%IQS&ªloªil^k*ql*fk`ljbªo^qflp+ Tbªqlrè)ª_ofbciv )ªlkªfpprbpªobi^qfkdªqlª@obafqªO^qfkdª>dbk`fbp)ªfkªpr_*pb`qflk 3+1)ª_bclobª`lkìrafkdªtfqeªpeloqª`ljjbkqpªlkª@bkqoîª@ibôfkdªElrpbpªcloªabofs* ^qfsbp)ª^kaªqebªkbbaªqlªa^jmbkªbka*vbôª%^kaªbka*nrôqbo&ªpmfhbpªfkªcfk^k`fî jôhbqpª%pr_*pb`qflkª3+2ª^kaª3+3&+

6.2 Remuneration

@ljmbkp^qflkªmo^`qf`bpª^qªcfk^k`fîªcfojpªe^sbª_b`ljbª^ªqlmf`ªlcªmôqf`riôªpòrqf* kvªfkªob`bkqªvbôp+ªQebªdbkboîªmr_if`ªe^pª_b`ljbªfkòb^pfkdivª^tôbªlcªqebªefde ibsbipªlcªobjrkbo^qflkªfkªqebªcfk^k`fîªpb`qloª^kaªfkafdk^kqªtebkªiôdbªpbsbo^k`b m^`h^dbpªôbª^tôabaªqlªbub`rqfsbpªtelªe^sbªmobpfabaªlsboªjbiqaltkpªfkªco^k * èfpbªsîrbp+ª?lqeªobdri^qlopª^kaªmo^`qfqflkbopªe^sbªob`ldkfwbaªqebªmlqbkqfîªclo mbosbopbªfk`bkqfsbpªqlªibâªqlªrkgrpqfcfbaªofphªq^hfkdª^kaªqerpªqlª`lkqof_rqbªqlªpvp* qbjf`ªfkpq^_fifqv+ªMlifqf`îªibâbop)ªjlpqªob`bkqivª^qªqebªD/-ªprjjfq)ªe^sbª`îiba cloª^ªobbu^jfk^qflkªlcªqebªfk`bkqfsbªpqor`qrobªlcª`ljmbkp^qflkªfkªqebªcfk^k`fî pb`qlo+ª Lkbª_bkbcfqªlcª^ªòfpfpªfpªqe^qªfqªmoljmqpª^`qflkªqlªabîªtfqeªsrikbo^_fifqfbpªqe^q e^sbª_bbkªîiltbaªqlª_rfiaªrmªlsboª^kªbuqbkabaªmboflaªlcª_bkfdkª`lkafqflkp+ªQeb ao^t_^`h)ªeltbsbo)ªfpªqe^qªe^pqvªobpmlkpbpª`^kªe^sbªrkfkqbkabaª`lkpbnrbk`bp) ^kaª`^kªcl`rpªlkªfpprbpªqe^qªe^sbªqebªdob^qbpqªmr_if`ªmolcfib)ª^pªlmmlpbaªqlªqeb jlpqªpfdkfcf`^kqªmo^`qf`îªfjm^`q+ª

49 50 The Fundamental Principles of Financial Regulation

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6.3 Loan-to-value ratios in mortgages

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6.4 Credit rating agencies

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2- Qebªtlopbª`lkcif`qªfpªfkªqebfoª`lkpriq^k`vª^kaªâsfplo vª^`qfsfqv+ Other Regulatory Issues 55 qlªefabª_befkaª@O>ªclob`^pqpªqe^k)ªcloªbu^jmib)ª_befkaªdlsbokjbkqªclob`^pqpªlc crqrobªdoltqe+ Qebªîqbok^qfsb)ªpb`lka)ª^mmol^èªfpªqlªobdfpqboª^kaªqlªobdri^qbªqebª@O>p)ª_rqªql ib^sbªqebjªtfqeª^ª`bkqoîªolibªfkªqebªobdri^qlo vªmol`bpp+ Lroªmobcbobk`bªfpªcloªqebªcfopqª^mmol^è+ªObdri^qflkªtfiiªklqªj^hbªqebª@O>pªclob* `^pqª_bqqbo8ª_rqªtfiiªjb^kªqe^qªqebª^rqelofqfbpªtfiiª_bª`lkglfkbaªfkªqebªobpriqfkd `lkabjk^qflkª^pª^kaªtebkªqebª@O>pªdbqªfqªtolkdªfkªcrqrob)ª^pªqebvªfkbsfq^_iv tfii+ªJloblsbo)ªdlsbokjbkqpªôbªqebjpbisbpªiôdb*p`îbªfpprbopªlcªab_q+ªJfdeqªdls* bokjbkqªobdri^qflkªqobpm^ppªlkªqebª%co^dfib&ªfkabmbkabk`bªlcª@O>pªtebkªfqª`ljbp qlªo^qfkdªprèªab_q<

6.5 Centralized clearing house arrangements vs. OTC markets

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6.6 Year-end spikes

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2. Pbbª?orkkbojbfboª%/--6&ªcloª^ªqeblobqf`îªbumi^k^qflkªeltªkbqtlohªbccb`qpªfkªlsboªqebª`lrkqbo*jô * hbqªôo^kdbjbkqpª`^kªibâªqlªâsbopbª^jmifcf`^qflkp+ 56 The Fundamental Principles of Financial Regulation clotôaªfkqlªqebªi^qbª^rqrjkªcloªtbbhp)ªfcªklqªjlkqepªêbâ+ªB^èªfkpqfqrqflk t^kqpªqlªtfkalt*aobppªqebfoªmr_ifpebaªbka*vbôªcfdrobªqlªpeltª^ªabdobbªlcªifnrfa* fqvªqe^qªqebvªalªklqªcbbiªqebªkbbaªcloª^qªlqeboªqfjbp+ Qe^qªqefpªpelriaª_bªîiltbaªqlªafpormq)ªloªqeob^qbkªqlªafpormq)ªcfk^k`fîªpvpqbjp ^mmbôpª^_proa+ªQebobªôbªpbsboîªmlqbkqfîªobjbafbp+ªQebªfkpqfqrqflkpª`lriaª_b obnrfobaªqlªobmloqª^kª^sbo^dbªcfdrob)ª%lsboªqebªi^pqªnrôqbo&)ªq^hbkª^qªjlkqeivªlo tbbhivªl_pbo s^qflkp+ª>iqbok^qfsbiv)ªqebª^rqelofqfbpª`lriaªgrpqªc^`fifq^qbªte^qbsbo tfkalt*aobppfkdªqebªfkpqfqrqflkpªt^kqbaª_vªlccbofkdªlkb*a^vªobmlpªlkª^ªj^ppfsb p`îb+ªQebªobpriqfkdª_î^k`bªpebbqªtlriaªlcqbkªeôaivª_bªÖc^foª^kaªqorbÖ)ª_rqªqeb bka*vbôªpmfhbªfpªb`lkljf`îivªa^j^dfkd)ªbpmb`fîivª^qª^ªqfjbªlcªco^vbaªkbo sbp+ Pljbªplirqflkªkbbapªqlª_bªclrka+

6.7 Crisis management

B^èª]fkafsfarîivªpvpqbjf`$ªcfk^k`fîªfkpqfqrqflkªpelriaª_bªobnrfobaªqlªmolsfabª^k ^kkrîª`lkqfkdbk`vªmi^kªcloªabîfkdªtfqeªfqpªltkª_^khormq`v +ªQebª`lkqfkdbk`v mi^kªpelriaªfkìrabªmol`barobpªeltª_bpqªqlªrktfkaªbufpqfkdªmlpfqflkpª^kaªl_if * d^qflkp+ªPmb`fîªbjme^pfpªpelriaª_bªmi^`baªlkªqebªmlqbkqfîªofphªpmfiilsbopªqlªlqebo cfk^k`fîªfkpqfqrqflkpª^kaªqebªb`lkljvª^pª^ªtelib+ 7 The Structure of Regulation

>ªpbkpf_ibªjûfjªfkªqefpªcfbiaªfpªqlªabcboªabibd^qflkªlcªobpmlkpf_fifqvªqlª^kªfkpqf * qrqflkªcloª^èfbsfkdªpljbªl_gb`qfsbªrkqfi)ª^kaªrkibpp)ªlkbª`^kªîplªbnrfmªqe^q fkpqfqrqflkªtfqeªprccf`fbkqªmltbopª^kaªfkpqorjbkqpªqlª^èfbsbªqe^qªbka+ªQebobªe^p _bbkªpljbªqbkabk`vªfkªqebªm^pqªqlªîil`^qbªobpmlkpf_fifqvªcloªcfk^k`fîªpq^_fifqvªql @bkqoîª?^khpªtfqelrqªarbª`lkpfabo^qflkªlcªte^qªfkpqorjbkqpªqebvªjfdeqªrpbªql ^èfbsbªqe^qªl_gb`qfsb+ Qebªlkbªfkpqorjbkqªqe^qªqebvª`lriaªtfbia)ªqebªpeloqªqbojªfkqbobpqªo^qb)ªe^pª_bbk mobaf`^qbaªqlªqebª^èfbsbjbkqªlcª%dllapª^kaªpbosf`bp&ªfkci^qflk+ªQebªob`bkqªmbofla lcªcfk^k`fîªqrojlfiªe^pªo^fpbaªnrbofbpªtebqeboªqebªmofjô vªqôdbqªlcªmof`bªpq^_fif * qvªpelriaª_bªtfabkbaªqlªfkìrabª^ppbqªmof`bp+ªTefibªtbªalªprddbpqªqe^qª^kª^mmol * mof^qbªjb^probªlcªelrpfkdªmof`bpªpelriaª_bªfkªqebªmof`bªfkabuªrpbaªcloªqebªfkci^ * qflkªqôdbq)ªtbªalª_bifbsbªqe^q)ªtebobsboªmlppf_ib)ª^ªpbmô^qbªl_gb`qfsbªpelriaª_b ^èfbsbaª_vª^ªpbmô^qbªfkpqorjbkqª%qebªQfk_bodbkªmofk`fmibªlcªobi^qfkdªfkpqorjbkqp qlªqôdbqp&+ªQerpªqebªl_gb`qfsbªlcªcfk^k`fîªpq^_fifqvªpelriaª_bª^èfbsbaª_vªqeb absbilmjbkqª^kaª^mmif`^qflkªlcªfkpqorjbkqpªabpfdkbaªcloªqe^qªmromlpb+ªLcª`lropb qebªrpbªlcªbfqeboªfkpqorjbkq)ªfkqbobpqªo^qbpª^kaªj^òl*morabkqfîªobdri^qlovªjb^p* robp)ªtfiiª^ccb`qªqebª`lkgrk`qrobªfkªtefèªqebªlqeboªlmbo^qbp+ªªFkabba)ªfkª`fo `rj* pq^k`bpªtebkªnr^kqfq^qfsbªb^pfkdªfpª_bfkdªrpba)ªqebªqtlªfkpqorjbkqpªj^vªjbodbªql _b`ljbªîjlpqªfkafpqfkdrfpe^_ib+ªª?rqªtbªalªklqªsfbtªqefpª^pª^ªpboflrpªmol_ibj+ Fqªe^pª_bbkª^ªmofjô vªmromlpbªlcªqefpªm^mbo )ªfkªpb`qflkpª0ªqlª2ªqlªphbqèªlrq j^òl*morabkqfîªfkpqorjbkqpªqe^qª`^kª_bªrpbaªfkªqefpªt^v +ªTbªifhbªqlªqefkhªqe^q tbªe^sbªmolmlpbaª^ªprccf`fbkqªôjlro v+ª>kªfjmloq^kqªnrbpqflkªfpªqebª_î^k`b _bqtbbkªafpòbqflkª^kaªoribpªfkªqebfoª^mmif`^qflk+ªQebªjlobªqe^qªqebªrqfifp^qflkªlc prèªfkpqorjbkqpªfpªifhbivªqlªmolslhbªlmmlpfqflkªcoljªj^gloªfkqbobpqªdolrmpª^qªqeb qfjbªlcªqebfoª^mmif`^qflk)ªqebªjlobªprèª^mmif`^qflkªkbbapªqlª_bª_^pbaªlkªmob*pbq) mob*^kklrk`ba)ª%bsbkªpq^qrqlo v&ªoribp+ªÖQ ^hfkdª^t^vªqebªmrkè*_lti)ªgrpqªtebk qebªmôqvªdbqpªdlfkdÖªfpªklªjlobªmlmriôªtfqeªobpmb`qªqlª^ppbqªmof`bª_lljp)ªqe^kªql qebªj^òl*b`lkljf`ª`lkgrk`qrob+ªCloªqefpªi^qqboªob^plkªtbªtlriaªâsl`^qbªqe^q jrèªlcªqebª`lrkqbo*`vìf`îªôjlro vªqe^qªtbªe^sbªprddbpqbaª_b`ljbpª`lrèba fkªmobprjmqfsb)ªorib*_^pbaªqbojp+ Qeolrdelrqªtbªe^sbªbjme^pfwbaªqebªafccbobk`bpª_bqtbbkªj^òl*morabkqfî ^kaªjfòl*morabkqfîªobdri^qlo vªjb^probp+ªPrèªafccbobk`bpªbuqbkaªk^qroîivªql qebªbqelp)ªafp`fmifkbª^kaª`riqrobpªlcªqebªfkpqfqrqflkpªfkslisba+ªQebªj^òl*morabk* qfîªfkpqfqrqflkªpelriaª_bªj^òl)ª^ddobd^qb)ªpvpqbjf`ª^kaªb`lkljf`ªfkªlrqillh8ªqeb jfòl*morabkqfîªfkpqfqrqflk%p&ªpelriaª_bªjlobªjfòl)ªfkafsfarî)ªmorabkqfî)ªibdî ^kaª^``lrkqfkd*_^pba+ªQefpªfpªìlpbivªfkª^``loaªtfqeªqebªRPªQob^prov)ªÖ?irbmofkqªclo

57 58 The Fundamental Principles of Financial Regulation

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tôkfkd)ªqebªolibªtbªbksfp^dbªcloªqebªCPCªfpªklqªdob^qivªafc * cbobkqªcoljªqebªlkbªfqªmi^vpª^qªqebªjljbkq+ª?rqªtbªalªpbbª^ªkbbaªcloªjlafcf`^ * qflkpªqlªfjmolsbªqebªè^k`bpªqe^qªtôkfkdpªalªklqªdlªrkebbaba+ªLkbªtlriaª_b qlªdfsbª`l*obpmlkpf_fifqvªcloªbôivªtôkfkdpªqlªqebªFJC)ªbke^k`fkdªqebª^rqelofqvªlc qebªobpriqfkdªgradjbkqp)ª^kaª_ofkdfkdªfkªqebªFJCÖpªj^òlb`lkljf`ªbumboqfpb+ªQ l p^cbdrôaª^d^fkpqªmlifqf`îªmobpprobªqlªmriiªmrkèbp)ªBôivªTôkfkdªObmloqpªpelria _bªmolar`baªrkaboªqebª^rqelofqvªlcªqebª@e^foj^kªlcªqebªCPCª^kaªqebªJ^k^dfkd Afob`qloªlcªqebªFJC )ªtfqelrqªbafqfkdª_vªjbj_boª`lrkqo vªobmobpbkq^qfsbp+ªT fqe 62 The Fundamental Principles of Financial Regulation obdôaªqlªqebªCPCÖpªob`ljjbka^qflkp)ª`lrkqofbpªtlriaª_bª^phbaªqlª]`ljmivªlo bumi^fk$ªqebfoªobpmlkpbp+ª @ofpfp obplirqflk mobpbkqpªmboe^mpªqebªdob^qbpqªèîibkdb+ª>pªîobâvªklqba)ªòfpfp obplirqflkªrprîivªfkslisbpªcfp`îªobplro `bpª^kaªqerpªfkslisbpªdlsbokjbkqpª^ka môif^jbkqp+ªFkªqebª`^pbªlcª^ªcfk^k`fîªòfpfpªprèª^pªqebªlkbªtbªôbªkltªbumbof * bk`fkd)ªfqªfpªeôaªqlªpbbªdlsbokjbkqpªabibd^qfkdªqefpª^rqelofqvªqlª^kªfkqbok^qflk * îªlod^kfp^qflk)ªloªrpfkdªaljbpqf`ª_radbqô vªobplro`bpªqlªebimªprmmloqªqebªòlpp* _loaboªlmbo^qflkpªlcªclobfdk*_^pbaªcfk^k`fîªfkpqfqrqflkp+ªTbªob`ldkfpb)ªqebobclob) qe^qªqebª_bpqªqe^qª`^kª_bªbumb`qbaªfpªqlªrpbª`llmbo^qfsbªjbè^kfpjp)ª^kaªbufpqfkd afp`rppflkªclo^ªqlªfjmolsbªfkcloj^qflkªbuè^kdbª^kaªqlªmoljlqbªkbdlqf^qflkpªlk lmqfjîªobplirqflkªpqo^qbdfbp+ Qebªpfdkfcf`^k`bªlcªqefpª^`qfsfqvªpelriaªklqª_bªjfkfjfpba)ªeltbsbo +ªTebob qebobªôbªdil_îªo^jfcf`^qflkpªcoljª^ªmôqf`riôª`lropbªlcª^`qflk)ª`lrkqofbpªobmob * pbkqbaªfkªqebªCPCªpelriaª`ljjfqªqlª^slfaªjb^probpªeôjcriªqlªqebªfkqbobpqpªlc lqebop+ªTebkª^ª`lrkqo vªfpª`lkqbjmi^qfkdª^ªjb^probªqlªmolsfabªpvpqbjf`ªprmmloq qlªfqpªcfk^k`fîªpvpqbj)ª%cloªbu^jmib)ª^ªdrô^kqbbªlcª_^khªabmlpfqp&ªfqªpelriaª^``bmq ^kªl_ifd^qflkªqlªfkclojªmôqkboª`lrkqofbpªlcªfqpªfkqbkqflkpªfkªâs^k`bªlcªqebfo fjmibjbkq^qflk)ª^kaªqlªmolsfabªcloª^kªâbnr^qbªfkqbo sîªqlª`lkpfaboªqebªfkqbok^ * qflkîªfjmif`^qflkpªlcªprèª^`qflkp+ªKlkbªlcªqefp)ªlcª`lropb)ªtlriaªdrô^kqbbª^ `llmbo^qfsbªlrq`ljb+ª?rqªfqªtlriaª^qªib^pqªbkprobªqe^qªqebªjbè^kfpjpªbufpqbaªql mbojfqªprèª^ªobplirqflk)ªfcªqebªmlifqf`îªtfiiªt^pªqebob+ 8 Conclusions

Qebªabpfdkªlcªcfk^k`fîªobdri^qflkªfpªklqªpqo^fdeq*clo tôa+ªTebkªbsbovlkbªfpª_^v* fkdªcloªjlob)ªqlrdeboªobdri^qflk)ªfqªfpªklqªkbbaba)ª%_b`^rpbªbsbo vlkbªfpªofph ^sbopb&+ªTebkªprèªobdri^qflkªfpª_âivªkbbaba)ªklªlkbªt^kqpªfq)ª%pfk`bªqebªdlla qfjbpªôbªbumb`qbaªqlªoliiªlk&+ªªQefpªprddbpqpªqe^qªcfk^k`fîªobdri^qflkªpelriaª_b cl`rppba)ªmofjôfivªorib*_^pba)ª%_b`^rpbªafpòbqflkªtfiiª_bªeôaªqlªrpbªarofkdªmbof * lapªlcª_llj,brmelof^&)ª^kaªqfjbª^kaªpq^qb*sô vfkdª%ifdeqªarofkdªklojîªmboflap) fkòb^pfkdª^pªpvpqbjf`ªqeob^qpª_rfiaªrm&+ªQebªPm^kfpeªavk^jf`ªmob*molsfpflkfkd pèbjbªfpª^_lrqªqebªlkivª`roobkqªfkpqorjbkqªqe^qªjbbqpªqebpbªòfqbof^+ Lroª^kîvpfpªlcªqebªpq^qbªlcªcfk^k`fîªobdri^qflkªibâpªlkªqlªnrfqbª^ªibkdqevªifpq lcªhbvªmlfkqpª^kaªob`ljjbka^qflkpªtefèª`^kª_bªafsfabaªfkqlªclroªj^fkªebâ * fkdp)ªqlªtfqªDbkboî)ª@^mfqî)ªIfnrfafqvª^kaªLqebo +

8.1 General conclusions and recommendations (primarily from Chapters 1 and 2)

.+ Obdri^qflkª%buqbokîªfkqbo sbkqflk&ªpelriaªît^vpª_bª`^m^_ibªlcªgrpqfcf * `^qflkª^pª^ª`lkpbnrbk`bªlcªpljbªpmb`fcfbaªjôhbqªc^firob /+ Qebªj^fkª`^rpbªlcªbuqbokîfqfbpªôfpbpª_b`^rpbªqebªpl`fîª`lpqªlcªpvpqbjf` cfk^k`fîª`lii^mpbªbu`bbapªqebªmofs^qbª`lpqªqlªqebªfkafsfarîªcfk^k`fî fkpqfqrqflkpª%^kaªjôhbqp&+ª>ª`lii^mpbªlcª^ªcfk^k`fîªfkpqfqrqflkª`^rpbp ofphªpmfiilsbop+ªBccb`qfsbªobdri^qflkªpelriaªmolsfabªfk`bkqfsbpªcloªcfk^k * `fîªfkpqfqrqflkpªqlªfkqbokîfwbªqebpbªbuqbokîfqfbpª%ofphªpmfiilsbop&+ 0+ Qebªj^fkª`^rpbªlcªpvpqbjf`ª`lii^mpbªfpªbkaldbklrpªofph)ªqebªifhbifella lcªpbic*^jmifcvfkdªpmfoîpªifhbªqebªilppª^kaªjôdfkªpmfoî+ 1+ Pqobppªqbpqpªbu^jfkbªqebªobpmlkpbpªlcª_^khpªqlªbuldbklrpªofphp+ª?vª`lk * pqor`qflkªqebvªalªklqªfk`lomlo^qbªbkaldbklrpªofph+ª@ljmibqbivªkbt qbèkfnrbp)ªmboe^mpª_^pbaªlkªjlabipª^kaªbkaldbklrpªofph*pmfiilsbo jb^probp)ªifhbª@lSÔ)ªkbbaªqlª_bªabsfpbaªqlªbumilobªqebªfjmif`^qflkpªlc bkaldbklrpªofphªcloªqebªpvpqbj+ 2+ Obnrfobjbkqpª_^pbaªlkªjfkfjrjª`^mfqîªo^qflpªalªklqªmolsfab obpfifbk`b)ªpfk`bªqebvª`^kklqª_bª_ob^èba+ªQebvªobmobpbkqª^ª_roabkªql _^khp)ªklqª^ªplro`bªlcªpqobkdqe+ 3+ Obnrfobjbkqpªpelria)ªfkpqbâ)ª_bªklojîivªobpq^qbaªfkªqbojpªlcªefdebo qôdbqªibsbipªlcª`^mfqî)ªtfqeª^ªpmb`fcf`)ªpq^qrqlo vª%f+b+ªklqªafpòbqflkô v& ^kaªclo`bcriªiâaboªlcªfkòb^pfkdªp^k`qflkp+ªQefpªiâaboªpelriaªe^sbª^

63 64 The Fundamental Principles of Financial Regulation

jfkfjrjªmlfkqª^qªtefèªbfqeboªqebªabcf`fbk`vªfpªp^qfpc^`qlofiv obaobppba)ªloªqebªfkpqfqrqflkªfpªperqªaltk)ªf+b+ªmoljmqª`loob`qfsbª^`qflk) m+`+^+ 4+ Qebªobpmlkpbªqlªqebª`roobkqªòfpfpªe^pªibaªfkªpbsboîª`lrkqofbpªqlª^ªcro * qeboª`lk`bkqo^qflkªlcªqebª_^khfkdªpvpqbjª^ka)ªmboe^mp)ªbipbtebob ^jlkdpqªebadbªcrkap+ªDob^qboªfkqbo sbkqflkªqlªbk`lro^dbª`ljmbqfqflk ^kaªqlªmobsbkqªlifdlmlifpqf`ª_be^sflroªj^vªtbiiª_bªtôo^kqba+

8.2 Capital requirements (primarily from Chapters 3 and 4)

.+ ?^khp)ª^kaª^kvªlqeboªcfk^k`fîªfkpqfqrqflkªpr_gb`qªqlªabmlpfqªfkpro^k`b) pelriaª_bªpr_gb`qªqlªpljbª%ilt&ªjfkfjrjª`^mfqîªobnrfobjbkq+ªQefpªfp klqªqlª_bªpbbkª^pª^ªmolqb`qflkªcloªqebªobdri^qbaªfkpqfqrqflkª%o^qeboªqeb obsbopb8ªfqª`lkpqo^fkpªqebª_^khp&)ª_rqª^pª^ªmolqb`qflkªcloªqebªabmlpfq fkpro^k`bªcrka)ª^kaª^ªqofddboªcloªm+`+^+ /+ >iiªobdri^qlop,prmbosfplopªfkªb^èª`lrkqovªpelriaª^dobbªqebfoªltkªifpqªlc pvpqbjf`ªfkpqfqrqflkpª^kaªjôhbqp)ª^kaª_bªmobmôbaªqlªbuè^kdbªifpqp tfqeªprmbosfplopªfkªlqeboª`lrkqofbp+ª>iqelrdeªprèªifpqpªpelriaªklqª_b jâbªmr_if`)ª%l+^+ªjloîªe^wôaª^kaªqebªcrwwvªabcfkfqflkªlcªÖpvpqbjf`Ö&) qebobªpelriaª_bªjbè^kfpjpªcloªbkprofkdªqe^qªobdri^qlop,prmbo sfplop q^hbªqefpªbubo`fpbªjlpqªpboflrpiv+ª 0+ >iiªprèªpvpqbjf`ªfkpqfqrqflkpªpelriaª_bªpr_gb`qª_lqeªqlªjfòl*morabk * qfîªobdri^qflk)ªbu^jfkfkdªqebfoªfkafsfarîªofphªèô^`qbofpqf`pª%îlkd qebªifkbpªlcª?^pbiªFF&ª^kaªqlªj^òl*morabkqfîªobdri^qflk)ªobi^qbaªqlªqebfo `lkqof_rqflkªqlªpvpqbjf`ªofph+ªT bªprddbpqªqe^qªqefpªi^qqboª_bªalkbª_v âgrpqfkdªqebªjfòl*morabkqfîªo^qflª_vª^ª`l*bccf`fbkqªobi^qfkdªqlªqeb j^òl*morabkqfîª^ppbppbaªofph+ 1+ J^òl*morabkqfîªobdri^qflkªpelriaª_bª`lrkqbo `vìf`îª^kaªib^kªbpmb * `fîivª^d^fkpqª_r__ibpªtelpbª_ropqfkdª`^kªfjm^foªqebªcfk^k`fîªfkqbojb* af^qflkªpb`qlo+ª 2+ Tbªôdrbªqe^qªqebª_bpqªjb^probpªlcª^kªfkpqfqrqflkÖpª`lkqof_rqflkªql j^òl*morabkqfîªofphªôbªfqpªibsbo^db)ªj^qrofqvªjfpj^qèª^kaªo^qbªlc bum^kpflk+ªJlobªmob`fpbªbkaldbklrpªofph*pmfiilsboªjb^probpªqe^qªîpl q^hbªifnrfafqvª^pmb`qpªfkqlª^``lrkqªpelriaª_bªabsbilmba+ªPlªtbªtlria fkqbo^`qªb^è)ªpvpqbjf`)ªfkpqfqrqflkÖpªqfboª.ª?^pbiªFFªo^qflª_vªjriqfmif`^ka) tefèª`lriaª_bª_bilt )ª^pªtbiiª^pª^_lsb)ªrkfqv )ª_^pbaªlkª^ªjfuqrobªlc ibsbo^db)ªj^qrofqvªjfpj^qèª^kaªdoltqe+ 3+ Fkpqfqrqflkpªtefèªôbªklqªfkafsfarîivªpvpqbjf`)ª_rqªtefèªôbª%f&ªefde* ivªibsbo^dbaªtfqeªpeloq*qbojªab_qª^kaª%ff&ªeliaª^ppbqpªtfqeªiltªjôhbq ifnrfafqvª%^qªqfjbpªlcª^ªòfpfp&)ª`^kªkbsboqebibppªe^sbªpvpqbjf`ªbccb`qpªsf^ glfkqªeboa*qvmbª_be^sflro+ªPlªqebvªpelriaªîi)ªbu`bmqªcloªqebªqfkfbp)ª_lqe obmloq)ª^kaªe^sbªpljbª`lkpqo^fkqpª%fkªqebªclojª^d^fkªlcª^ªiâaboªlcªp^k`* qflkp&)ªlkªqebfoªj^òl*morabkqfîªofphfkbpp)ªf+b+ªqebfoªibsbo^db)ªj^qrofqv jfpj^qèª^kaªòbafqªbum^kpflk)ª%tefèª`lriaªmboe^mpªsô vª_bqtbbk hfkapªlcªfkpqfqrqflkp)ªb+d+ª_^khpª^kaªebadbªcrkap&+ Fqªtlriaª_bªcloªafp`rppflk)ª%^kaªlroªdolrmª`lriaªklqª^dobb&)ªtebqebo prèªefdeiv*ibsbo^dba)ª_rqªfkafsfarîivªklk*pvpqbjf`)ªfkpqfqrqflkp pelriaªîplªe^sbª^kv âafqflkîªjfòl*morabkqfîªobdri^qflk+ 4+ >ppbq*mof`bª^kaªòbafqª`vìbpªafccboªcoljª`lrkqo vªqlª`lrkqo v)ª^kaªcolj Conclusions 65

obdflkªqlªobdflk+ª>iqelrdeªqebªmofk`fmibpªlcª`lrkqbo*`vìf`îªobdri^qflk pelriaª_bªrkfsbopî)ªfqpª^mmif`^qflkªtlriaªibâªqlªafccbofkdªo^qflpªfk b^èªôb^ª^mmivfkdªqebªobdri^qflkp)ªklojîivªfkªqebªelpqª`lrkqo v+ 5+ B^èªelpqª`lrkqo vª%obdflk&ªpelriaªe^sbªqebªofdeqªqlªabpfdk^qbª^ªòlpp* _loaboªpr_pfafôv)ªloª_o^kè)ª^pªÖpvpqbjf`Ö+ªPvpqbjf`ª_o^kèbpªpelriaª_b obnrfobaªqlª_b`ljbªpr_pfafôfbp+ªClobfdk*ltkbaªpr_pfafôfbpªpelriaª_b pr_gb`qªqlªqebªp^jbª`^mfqîªobnrfobjbkqª`î`ri^qflkp)ª^kaªeliaªqe^qªfk aljbpqf`ª^ppbqp)ª^pªfqpªltkªaljbpqf`ª_^khp+ 6+ >kªîqbok^qfsbª^mmol^è)ªtefèªjfdeqª_bªibppªoâf`î)ªtlriaª_bªqlªdbk * boîfpbª^kaªqlªbuqbkaªqebªmobpbkqªPm^kfpeªavk^jf`ªmob*molsfpflkfkd pèbjbªqlªîiª`lrkqofbp)ªqelrdeªqefpªîplªtlriaªkbbaªqlª_bª^mmifbaªlk ^ª`lrkqov*_v*`lrkqovª_^pfp+ªFcªqefpªtbobªqlª_bªalkb)ªFCOPªtlriaªe^sbªql _bªobsfpbaªqlªmbojfqªqefp+ .-+Qebª^mmif`^qflkªlcªj^òl*morabkqfîªjb^probpªpelriaª_bª_vªqebª@bkqoî ?^kh8ªcloªqefpªmromlpbªqebvªpelriaª_bª^_ibªqlªrkaboq^hbª%lk*pfqb&ªprmbo* sfpflkªlcªfkafsfarîªpvpqbjf`ªfkpqfqrqflkp)ªpbmô^qbivªcoljªqebªjfòl* morabkqfîªprmbosfplo%p&+ªBccloqpªpelriaª_bªjâbªqlªifjfqªqebªâjfkfp * qo^qfsbª_roabkªlcªjriqfmibªprmbosfplop)ª^kaªobmloqfkdªobnrfobjbkqpª^ka abcfkfqflkpªpelriaª_bªeôjlkfpba+

8.3 Liquidity (primarily from Chapter 5)

.+ Tbªmolmlpbª^ªÖjôhªqlªcrkafkdÖª^mmol^èªqlªmolsfabªfk`bkqfsbpªcloªjlob ilkd*qbojªcrkafkd+ªQefpª^mmol^èªfp)ªfkªbccb`q)ªìlpbivª^hfkªqlªqebªj^qr* ofqvªjfp*j^qèªiâaboªmobsflrpivª`lkpfabobaª_vªqebª?^pbiª@ljjfqqbbªlk ?^khfkdªPrmbosfpflkª%?@?P&ª^kaª_vªpljbª@bkqoîª?^khp+ /+ Rkifhbªjlpqªprèªmofloªbubo `fpbpªtbªtlriaªîplªmolsfabªfk`bkqfsbpªql eliaªifnrfafqvª_v)ªlk`bª^d^fk)ªfkqbo^`qfkdªqebª^ppbppbaªifnrfafqvªtfqeªqeb `^mfqîªâbnr^`vªo^qfl+ªIfnrfafqvªfpªjb^probaª_vª^kªbccb`qfsbªj^qrofqv jfpj^qèªtefèªq^hbpªqebªjôhbqªifnrfafqvªlcª^ppbqpª%^qªqfjbpªlcªòfpfp& fkqlª^``lrkq+ªQebªjlobªifnrfafqvªcbiiª_biltªqebªtbii*qôdbqbaªibsbi)ªqeb efdeboªqebª@>Oªtlriaªe^sbªqlª_b)ª^kaªsf`bªsbop^+ªQebªobi^qflkpefm %qoâb*lcc&ªkbbaªklq)ªeltbsbo)ª_bªifkbô+ 0+ Tbªalr_qªtebqeboªâafqflkîªmofs^qbªfkpro^k`bª`^kªqebkªebimªjrèªlk l``^pflkpªtebkªjôhbqª^kaªcrkafkdªifnrfafqvªs^kfpebp8ªqebªbu^jmibpªlc qebªjlkl*ifkbpª^kaªlcª>FDª`lkcfojªlroªalr_qp+ªQebª^kptboªtlriaªpbbj qlª_bªpljbª`lj_fk^qflkªlcªmr_if`ªpb`qloªjôhbq*j^hfkd)ª%^pªkltª_vªqeb Cbaªfkªqebª@Mªjôhbq&)ª^kaªmr_if`ªpb`qloªfkpro^k`b)ª%drô^kqbbpªlcªlkb hfkaªloª^klqebo&+ 1+ Tbªprddbpqªqe^qªjôh*ql*crkafkdªjfdeqª_bª^ªmofk`fmibªqe^qª`lriaª^mmiv qlªqebªmloqcliflpªlcªcfk^k`fîªfkpqfqrqflkpªcloª^``lrkqfkdªmromlpbp) bfqeboª^pª^kªîqbok^qfsb)ªloª^ªprmmibjbkq)ªqlªqebªmobpbkqª`^qbdlofbp)ªf+b+ eliaªqlªj^qrofqv)ª^s^fi^_ibªcloªpîb)ªqoâfkdª_llh+ 2+ Qlªlsbo`ljbªab_qªlsboe^kdªmol_ibjp)ªqebªobdri^qloªpelriaªe^sbªqeb ^rqelofqvªqlª`lksboqªprèªsbopflkpªlcªbufpqfkdªab_q)ª^pªîobâvª`lrkqpª^p qfboª.ªloªqfboª/ª`^mfqî)ªfkqlªbnrfqv + 66 The Fundamental Principles of Financial Regulation

8.4 Other considerations (primarily from Chapters 6 and 7)

.+ Tbªmolmlpbªqe^qªprmbo sfplopªpelriaªclojri^qbª^ªpbqªlcªobjrkbo^qflk drfabifkbp)ª^ka)ª%^pªfkªlqeboªbu^jmibpª_bilt&)ªâgrpqª`^mfqîªo^qflp ^``loafkdªqlªqebªabdobbªlcª`ljmif^k`b+ª /+ Tbªâsl`^qbªqebª@bkqoîª?^khªpbqqfkdªjûfjrjªIl^k*ql*S îrbª%IQS& o^qflpªcloªobpfabkqfîªjloqd^dbpª^pª^kªâafqflkîªj^òl*morabkqfîªjb^p* rob+ªQefpªtlriaªfkslisb)ª^pª^ª`loliiôv)ªlrqi^tfkdªpbsboîªl_sflrpª^slfa* ^k`bªjb^probp)ªb+d+ªpb`lkaªjloqd^dbp+ 0+ Tbªôdrb)ª^qªpbsboîªmlfkqp)ªqe^qªòbafqªo^qfkdpªôbªpvpqbj^qf`îivªjfp * rpbaªfkªqebªobdri^qlo vªmol`bpp+ªTebob^pªtbªôbªe^mmvªqlªpbbªcroqebo qfdeqbkfkdªlcªÖ`lkcif`q*lc*fkqbobpqÖª^kaªqo^kpmôbk`vªobdri^qflkp)ªtb tlriaªlqebo tfpbªpbbhªqlªbuìrabª@OLpªcoljªqebªobdri^qlo vªkbqtloh îqldbqebo+ªTbªobdôaª_lqeªqebª?^pbiªFFª^mmol^èªqlªqebªrpbªlcªòbafqªo^q* fkdpª^kaªqebªBrolmb^kªmolmlpîpªcloªqebfoªbke^k`baªobdri^qflkª^pªjfp * `lk`bfsba+ 1+ Tbªprmmloqªqebªbccloqpªlcªqebª@OJMDªqlªjlsbªpvpqbjf`îivªfjmloq^kq abofs^qfsbªjôhbqpªlkqlª`bkqoîfpbaªìbôfkdªelrpbp+ 2+ B^èª]fkafsfarîivªpvpqbjf`$ªcfk^k`fîªfkpqfqrqflkªpelriaª_bªobnrfobaªql molsfabª^kkrîivª^ªcriiª`lkqfkdbk`vªmi^kªcloªabîfkdªtfqeªfqpªltkª_^kh* ormq`v+ 3+ Tbª`^kklqªrkabopq^kaªelt )ª^kaªtev )ªqebªbka*vbôªpmfhbªfkªcfk^k`fî jôhbqpªe^pª_bbkªîiltbaªqlªobj^fk+ªFqªfpª_lqeª^_proaª^kaªa^j^dfkd+ Tbªprddbpqªqtlªîqbok^qfsbªjbqelapªlcªboâf`^qfkdªfq+ 4+ ?b`^rpbª`vìbpª%fkª^ppbqªmof`bpª^kaªòbafq&ªsôvªcoljª`lrkqovªqlª`lrkqov) ^pªtbiiª^pªcoljªqfjbªqlªqfjb)ªtbªmolmlpbª^ªpefcqªlcªbjme^pfpªfkªobdri^ * qlovªmltbopªqltôapªqebªelpqª`lrkqo v+ 5+ ?b`^rpbªòfpfpªj^k^dbjbkqªfpªlcqbkªbuqobjbivªbumbkpfsb)ªfqªe^pªqlª_b alkbª_vªqebª%elpq&ª@bkqoîª?^khªfkª`lkgrk`qflkªtfqeªfqpªltkªJfkfpqo v lcªCfk^k`b+ª>pªpllkª^p)ª_rqªklqª_bclob)ªqebªbrolªôb^ªl_q^fkpªcfp`îªmlt* bopªqlªj^k^dbª^kvªprèªòfpbp)ª qebk j^òl*morabkqfîªj^k^dbjbkqª`^k _bªpefcqbaªcoljªqebªK^qflkîª@bkqoîª?^khpªqlªpljbªcbaboîªbrolªôb^ _lav+ 6+ Tebob^pªòfpfpªj^k^dbjbkqªe^pªqlª_bªalkbª^qª^ª%k^qflkî&ªibsbiª`lkpl * k^kqªtfqeªqebª^s^fi^_fifqvªlcªcfp`îª%qûm^vbo&ªcrkafkd)ªòfpfpªmobsbkqflk `^k)ª^kaªpelria)ª_bªalkbªfkqbok^qflkîiv+ªTbªj^hbªpbsboîªmolmlpîpªql obclojª_lqeªqebªpqor`qrobª^kaªobjfqªlcªqebªCfk^k`fîªPq^_fifqvªClorj+ Tbªe^sbªmrqªclotôaªkbôivª0-ªhbvªmlfkqpª^kaªob`ljjbka^qflkp+ªFcªâlmqba)ªqebv tlriaªè^kdbªqebªmobpbkqªpvpqbjªoâf`îivª^kaªcloªqebª_bqqbo + Appendix : The Boundary Problem in Financial Regulation

Qebobªôbª^ªkrj_boªlcªcrka^jbkqî)ªdbkbof`ªfpprbpªobi^qfkd)ª^qªîiªqfjbpª^kaªbsbov* tebobª%îjlpq&ªqlªcfk^k`fîªobdri^qflk+ªFkªmôqf`riôªfcªobdri^qflkªfpªbccb`qfsb)ªfqªtfii `lkpqo^fkªqebªobdri^qbaªcoljª^èfbsfkdªqebfoªmobcbooba)ªrkobpqof`qba)ªmlpfqflk) lcqbk22 _vªiltbofkdªqebfoªmolcfq^_fifqvª^kaªqebfoªobqrokªlkª`^mfqî+ªPlªqebªobqrokp ^èfbs^_ibªtfqefkªqebªobdri^qbaªpb`qloªôbªifhbivªqlªcîiªobi^qfsbªqlªqelpbª^s^fi^_ib lkªpr_pqfqrqbpªlrqpfab+ªQebobªtfiiª_bª^ªptfqèªlcª_rpfkbppªcoljªqebªobdri^qbaªqlªqeb klk*obdri^qbaªpb`qlo+ªFkªloaboªqlªmolqb`qªqebfoªltkª_rpfkbppbp)ªqelpbªfkªqebªobdr * i^qbaªpb`qloªtfiiªpbbhªqlªlmbkªrmª`lkkb`qbaªlmbo^qflkpªfkªqebªklk*obdri^qbaªpb` * qlo)ªfkªloaboªqlª`^qèªqebª_bqqboªlmmloqrkfqfbpªqebob+ªQebªbu^jmibªlcª`ljjbo `fî _^khpªpbqqfkdªrmª^ppl`f^qbaª`lkarfqp)ªPFSpª^kaªebadbªcrkapªfkªqebªi^pqªòbafqª_r_ * _ibªfpª^ª`^pbªfkªmlfkq+ ?rqªqefpª`lkafqflkªfpªnrfqbªdbkboî+ªLkbªlcªqebªjlobª`ljjlkªmolmlpîp)ª^qªib^pq fkªqebªm^pq) 23 cloªabîfkdªtfqeªqebªsôflrpªmol_ibjpªlcªcfk^k`fîªobdri^qflkªe^p _bbkªqlªqovªqlªifjfqªabmlpfqªfkpro^k`bª^kaªqebªp^cbqvªkbqªqlª^ªpbqªlcªÖkôoltª_^khpÖ) tefèªtlriaª_bª`lkpqo^fkbaªqlªeliaªlkivªifnrfaª^kaªÖp^cbÖª^ppbqp+ªQebªfab^ªfpªqe^q qefpªtlriaªmolsfabªp^cbªabmlpfqpªcloªqebªlome^kpª^kaªtfaltp+ªJloblsbo)ªqebpbªkô* oltª_^khpªtlriaªorkª^ªìbôfkd*elrpbª^kaªhbbmªqebªm^vjbkqpÖªpvpqbjªfkªlmbo^ * qflk)ªte^qbsboªe^mmbkbaªbipbtebob+ªCloªîiªlqeboªcfk^k`fîªfkpqfqrqflkpªlrqpfabªqeb kôoltª_^khfkdªpvpqbj)ªfqªtlriaª_bª^ª`^pbªlcªÖ`^sb^qªbjmqloÖ+ªQebvªpelriaª_b îiltbaªqlªc^fi)ªtfqelrqªlccf`fîªprmmloqªloªqûm^vboªob`^mfqîfp^qflk+ Fkªc^`q)ªfkªqebªRHªpljbqefkdª^hfkªqlª^ªkôoltª_^khfkdªpvpqbjªt^pªmrqªfkªmi^`b fkªqebª.6qeª`bkqro vªtfqeªqebªMlpqªLccf`bªP^sfkdpª?^khª^kaªqebªQ orpqbbªP^sfkdp ?^kh+ª?rqªqebªfab^ªqe^qªqebªlccf`fîªp^cbqvªkbqªpelriaªe^sbª_bbkªobpqof`qbaªqlªMLP? ^kaªQP?ªt^pªkbsboªpboflrpivªbkqboq^fkba+ªKloª`lriaªfqªe^sbª_bbk+ªTebkª^ªÖkôolt _^khÖªfpª`lkpqo^fkbaªqlªeliafkdªifnrfa)ªp^cbª^ppbqp)ªfqªfpªpfjriq^kblrpivªmobsbkqba coljªbôkfkdªefdeboªobqrokp)ª^kaªqerpªcoljªlccbofkdª^pªefdeªfkqbobpqªo^qbp)ªloªlqebo sîr^_ibªpbosf`bp)ª%prèª^pªlsboao^cqp&)ªqlªfqpªabmlpfqlop+ªKloª`lriaªqebª^rqelofqfbp fkªdllaª`lkp`fbk`bªmobsbkqªqebª_olâboª_^khpªcoljªpbqqfkdªrmªqebfoªltkªìbôfkd elrpb+ªQerpªqebª_^khfkdªpvpqbjªlrqpfabªqebªkôoltª_^khpªtlriaªdoltªjrè c^pqboªrkaboªklojîª`fo`rjpq^k`bp8ªfqªtlriaªmolsfabªjlpqªlcªqebªòbafqªqlªqebªmof * s^qbªpb`qlo)ª^kaªmôqf`fm^qbªfkªqebªhbvªìbôfkdª^kaªpbqqibjbkqªmol`bppbpªfkªqeb

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67 68 The Fundamental Principles of Financial Regulation b`lkljv+24 Qefpªjfdeqª_bªmobsbkqbaª_vªi^t )ªq^hfkdªibdîªpqbmpªqlªmolef_fqª_olâboª_^khp coljªmolsfafkdªjb^kpªlcªm^vjbkqªloªbpq^_ifpefkdªìbôfkdª^kaªpbqqibjbkqªpvpqbjp lcªqebfoªltk+ªQebobªôb)ª^qªib^pq)ªclroªmol_ibjpªtfqeªprèª^ªjlsb+ªCfopq)ªfqªorkp ^clriªlcªmlifqf`îªb`lkljvª`lkpfabo^qflkp+ª>pªpllkª^pª^ªpfdkfcf`^kqª_lavªlcªslqbop e^pª^kªfkqbobpqªfkªqebªmobpbo s^qflkªlcª^ªì^ppªlcªcfk^k`fîªfkqbojbafôfbp)ªqebvªtfii abj^ka)ª^kaªob`bfsb)ªmolqb`qflk+ªTfqkbppªjlkbvªjôhbqªcrkapª^kaª]_ob^hfkdªqeb _r`h$ªfkªqebªRP>+ªPb`lka)ªfqªfpªfkqofkpf`îivªfiif_boî+ªQefoa)ªfqªfpªlcqbkªmlppf_ibªql dbqªôlrkaªprèªibdîª`lkpqo^fkqp)ªb+d+ª_vªe^sfkdªqebª_olâª_^khªm^ppªîiªm^vjbkq loabopªqeolrdeª^kª^ppl`f^qbaªkôoltª_^kh+ªClroqe)ªqebªob^plkpªcloªqebª^rqelofqfbpÖ `lk`bokªtfqeªcfk^k`fîªfkqbojbafôfbp)ªcloª_bqqboªloªtlopb)ªdlªtbiiª_bvlkaªfkpro * fkdªqebªj^fkqbk^k`bªlcªqebª_^pf`ªm^vjbkqªpvpqbjª^kaªqebªmolqb`qflkªlcªpjîi abmlpfqlop+ªKbfqeboª?bôªPqbôkpªkloªC^kkfbªJ^bªeâªpjîiªabmlpfqlop)ªloªmi^vba ^kªfkqbdoîªolibªfkªqebª_^pf`ªm^vjbkqªpvpqbj+ªKbsboqebibpp)ª^pªe^pªîobâvª_bbkªafp* `rppbaªfkªPb`qflkª2)ªtfqeªmôqf`riôªobpmb`qªqlªqfjb*sô vfkdªil^kªqlªsîrbªo^qflp) qebobªj^vªfkªpljbªfkpq^k`bpª_bª^kªôdrjbkqªcloªrpfkdªibdîªmolef_fqflkpªqlªebim mlif`bªqebª_lrkaôvª_bqtbbkªobdri^qbaª^kaªrkobdri^qbaªcrk`qflkp+ Tebkª^ªcfk^k`fîªòfpfpªalbpªl``ro)ªfq)ªrprîiv)ªcfopqª^qq^`hpªqebªrkmolqb`qbaªpb` * qlo)ª^pªl``roobaªtfqeªPFSpª^kaª`lkarfqpªfkª/--4+ª?rqªqebªbufpqbk`bªlcªqebªafccbobk * qfîª_bqtbbkªqebªmolqb`qbaª^kaªrkmolqb`qbaªpb`qloªqebkªe^pªqebª`^m^`fqvªqlªj^hb qebªòfpfpªtlopb+ªTebkªm^kf`ª^kaªbuqobjbªofphª^sbopflkªq^hbªelia)ªqebªabmlpfqlop fk)ª^kaªòbafqlopªql)ªqebªrkmolqb`qba)ªloªtb^hbo )ªpb`qloªpbbhªqlªtfqeao^tªqebfo crkap)ª^kaªmi^`bªqebpbªfkªqebªmolqb`qba)ªloªpqolkdbo)ªpb`qlo)ªqebob_vªobalr_ifkdªqeb mobpprobpªlkªqebªtb^hª^kaªrkmolqb`qbaªpb`qlop)ªtelªôbªqebkªclo`baªfkqlªcfobªpîbp lcª^ppbqp)ªbq`+ªQebª`lj_fk^qflkªlcª^ª_lrkaô vª_bqtbbkªqebªmolqb`qbaª^kaªqeb rkmolqb`qba)ªtfqeªdob^qboª`lkpqo^fkqpªlkªqebª_rpfkbppªlcªqebªobdri^qbaªpb`qlo ) îjlpqªdrô^kqbbpª^ª`vìbªlcªciltpªfkqlªqebªrkobdri^qbaªmôqªlcªqebªpvpqbjªarofkd `vìf`îªbum^kpflkpªtfqeªpraabkª^kaªafpil`^qfkdªobsbopîpªarofkdªòfpbp+ Bu^`qiv qebªp^jbªôdrjbkqpª`^kª_bªabmilvbaª^d^fkpqªqebªmolmlpîpªqe^qªtbªe^sb jâb)ªfkªPb`qflkª0)ªcloªqfjb*sô vfkdª`^mfqîªobnrfobjbkqp+ 21 >kaªjrèªqebªp^jb òfqf`fpjª`^kªîplª_bª^mmifbaªqlªlqeboªmolmlpîp)ªprèª^pªqebªobsbopflkªqlªqebªrpbªlc ^ªibsbo^dbªo^qflªcloª`^mfqîªâbnr^`vªobnrfobjbkqp)ªqe^qªjfdeqªifjfqªòbafqªbum^k * pflkª^kaªibsbo^dbªfkªqebª_llj+ Te^qªtbªl_pbosbªfkªqefpªi^qbpqªcfk^k`fîª`vìbªe^pª_bbk)ªcfopq)ª^ªerdbªbum^kpflk lcªòbafq)ª^ªj^ppfsbªofpbªfkªibsbo^dfkdªarofkdªqebªrmptfkd)ªcliiltbaª_vªqebªòfpfp) `roq^fijbkqªlcªòbafqªbum^kpflkª^kaªj^gloªabibsbo^dfkdªtfqeªpbsbob)ª^kaª`lkqfk * rfkd)ªbccb`qpªlkªqebªobîªb`lkljv +ªCloªob^plkpªtefèªôbª_vªkltªtfabivªrkabo * pqlla)ªqebªmobpbkqªobdri^qlo vªpvpqbjª%`ljmofpfkdªqebª?^pbiªobnrfobjbkqpª^kaªqeb jlsbªqlªjôh*ql*jôhbqª^``lrkqfkdªmo^`qf`bp&ªklqªlkivªafaªqllªifqqibªqlªobpqo^fk qebªrmptfkd)ª_rqªfpªîplªbu^`bo_^qfkdªqebªaltkqrok+ªFkªlqeboªtloapªfqªfpªefdeiv

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30 >ªj^gloªmol_ibjªtfqeªqebªpqo^qbdvªlcªlofdfk^qbªqlªafpqof_rqbªt^pªqe^qªqebªafpqof_rqflkªt^pªlcqbk melkv)ªlofdfk^qbª^kaªmobqbkaªqlªafpqof_rqbªqlª^ppl`f^qbaª`lkarfqp)ªPFSp)ªbq`+)ªtefèªtbobªlcqbkªôqfcf * `fîivª_bvlkaªqebª_lrkaôv)ª_rqªtebobªqebªofphª^kaª_î^k`bªpebbqª_roabkªciltbaª_^`hªqlªqebªj^fk _^khª^pªpllkª^pªqebªjôhbqªqrokbaªplro +ªTefibªclo`fkdªîiª_^khpªqlªobq^fkªpljbªobpfarîªmolmloqflk lcªpb`rofqfpbaªmolar`qpªj^vªtbiiª_bªabpfo^_ib)ªfkªloaboªqlªbk`lro^dbªmolmboivªafifdbkqªjlkfqlofkd) qebª_^khpªqe^qªdlqªfkqlªtlopqªqolr_ibªtfqeª@ALpª^kaªOJ?Pªtbobªqelpbªqe^qªobq^fkba)ªloªtbobªclo `ba qlªq^hbª_^`hªlkqlªqebfoª_llhp)ªqllªjrèªlcªprèªmolar`qp+ 31 Cloªbu^jmibªqebªmolsfpflkªlcªabmlpfqªfkpro^k`bªqlª_^khªabmlpfqlopªpelriaªîiltª_^khpªqlªl_q^fk obq^fiªcrkafkdªjlobªèb^miv+ 32 >ªhbvª`ljmlkbkqªlcªqfjb*sô vfkdªobdri^qlovª`lkqolipª`lriaª_bªqebªfjmlpfqflkªlcªqfjb*sô vfkd rmmboªifjfqpªlkªil^kªqlªsîrbªo^qflpªcloªobpfabkqfîªjloqd^dbp+ªPrèªifjfqpª`^kª_bªb^pfivª^slfabaª_v e^sfkdª^ªjôhbqªcloªpb`lkaªjloqd^dbp)ªloª_vª_llhfkdªprèªjloqd^dbpª^_olâ+ª?rqªqefpª`lriaª_b abqboobaª_vªj^hfkdªobpfabkqfîªjloqd^dbªab_qpªlkivªibdîivªob`lsbo^_ibªfcªcfk^k`baª_vª^ªcfopqªjloq * d^dbªfpprbaª_vª^ª_^khªpfqbaªfkªqebª`lrkqo v)ªf+b+ªfkìrafkdªpr_pfafôfbpª_rqªklqª_o^kèbpªlcªclobfdk _^khp+ Appendix: The Boundary Problem in Financial Regulation 73 qflkªpr``bbapªfkª^sboqfkdª^ªcrqrobª_rpq)ªfqªj^vªqebkªîplªe^sbª^mmbôbaªqlªe^sb _bbkªrkkb`bppôv! Fqªq^hbpª^ªilqªlcª`lro^dbªqlªq^hbª^t^vªqebªmrkè*_ltiªgrpqª^pªqebªmôqvªdbqp dlfkd+ªBsbkªfcªobdri^qlopªeâªprccf`fbkqªfkpqorjbkqp)ª%tefèªqebvªalªklqªklt e^sb&)ªqlªobpqo^fkª`vìbpªfkªòbafqªbum^kpflkª^kaª^ppbqªmof`bp)ªtlriaªqebvªe^sbªqeb `lro^dbªqlªrpbªqebj)ªfkªqebªc^`bªlcªrk`boq^fkqvªfkªkbbaª^kaªmol_^_ibªsfifcf`^qflk fkªmo^`qf`b<ªLkbªmôqfîª^kptboªqlªprèª^ªÖqfjbªfk`lkpfpqbk`vÖªmol_ibjªfpªqlªmrq jlobªobif^k`bªlkªmol`baroîªoribp)ªf+b+ªqlªpq^qbªmr_ifìvªfkªâs^k`bªqe^qªobdri^qflk tfiiª_bªqfdeqbkbaªfkª`boq^fkªpmb`fcfbaª`lkafqflkp)ª%b+d+ªtebkªelrpfkdªmof`bp) ^``loafkdªqlªfkabuªU)ªofpbª^qª^kª^kkrîªo^qbªc^pqboªqe^kªV8ªtebkªlsboîiª_^khªòba* fqªfkªqebª`lrkqo vªdoltpªc^pqboªqe^kªW8ªtebkªibkafkdª_vª_^khªFªdoltpªc^pqboªqe^k ^kkrîªo^qbªG)ªbq`+)ªbq`+&+ªMobcbo^_ivªqebobªpelriaª_bª^ªiâaboªlcªobpmlkpbp)ªklqª^ªpfk* dibªqofddboªmlfkq+ªQebªCAF@ªFjmolsbjbkqª>`qªlcª.66.ªfkªqebªRP>ªfpª^kªbu^jmibªlc ^ªmolmboªobdri^qlovªmol`barob+ Qebªjlobªbccb`qfsbªobdri^qflkªfp)ªqebªdob^qboªqebªfk`bkqfsbªqlªcfkaªt^vpªôlrka fq+ªTfqeªqfjbª^kaª`lkpfabo^_ibªjlkbvª^qªpq^hb)ªqelpbªtfqefkªqebªobdri^qlovª_lrka* ôvªtfiiªcfkaªt^vpªôlrkaª^kvªkbtªobdri^qflk+ªQebªl_sflrpªa^kdboªfpªqe^qªqeb obpriq^kqªafîb`qf`ª_bqtbbkªqebªobdri^qloª^kaªqebªobdri^qbaªtfiiªibâªqlªfkòb^pfkd `ljmibufqv)ª^pªqebªobdri^qbaªcfkaªillm*elibpªtefèªqebªobdri^qlopªqebkªjlsb %piltiv&ªqlªìlpb+ª?^pbiªFªjbq^jlomelpfpªfkqlª?^pbiªFF+ªPlªqebªmol`bppª_b`ljbpªbsbo jlobª`ljmibu)ªîjlpqª`boq^fkivªtfqelrqª_b`ljfkdªibppªmlolrp+ Eltª`^kªlkbªeîqªqebªlktôaªjô èªlcªqefpªafîb`qf`<ªQefpªfpªklqª^kªb^pvªq^ph+ Lkbª^mmol^è)ª^pªîobâvªklqba)ªfpªqlªifjfqªqebªmboflapªfkªtefèªobdri^qflkªfpªbccb`* qfsbivª_fqfkdªqlªqelpbªcbtªfkªtefèªfqªfpªbppbkqfî)ªplªqe^qªqebªlsboîiª`lpqp)ª^ka ebk`bªqebªfk`bkqfsbªqlª^slfa)ªprèªobdri^qflkªfpªibppbkba+ª>klqebo )ª^kaªmboe^mp jlobªfjmloq^kq)ªplirqflkªfpªqlªmi^`bªqebª_lrkaô vª^qª^ªmlfkqªtebobªciltpª^òlpp qebª_lrkaôv)ªpr_pqfqrqflkª_bqtbbkªì^fjpªlkªfkqbojbafôfbpªtfqefk)ª^kaªtfqelrq) qebª_lrkaôvªôbªifhbivªqlª_bªobi^qfsbivªilt +ª>pªabpòf_baªbôifbo )ªfqªfpªprèªciltp qe^qª`^rpbªqebªj^fkªmol_ibjp+ >ªhbvªfpprbªebobªobi^qbpªqlªebadbªcrkap+ªQebª^fjªpelriaª_bªqlªib^sbªprèªcrkap lrqpfabªqebªobdri^qlo vªkbq)ªrkibppªqebvª_b`ljbªplªiôdbª%loªplª`lkkb`qbaªtfqeª^ hbvªjôhbq&ªqe^qªqebfoªc^firobªtlriaª_bªpvpqbjf`îivª`^q^pqolmef`+ª?rqªfcªloafkô v mblmibªpelriaª_bdfkªqlªptfqèªbkªj^ppbª_bqtbbkªebadbªcrkapª^kaª_^khªabmlpfqp) qe^qªtlriaªklªilkdboª_bªcb^pf_ib+ªQebª^rqelofqfbpªpelriaªobnrfobªqe^qªîiªebadb crkapªlmbo^qfkdªfkªqebfoªltkª`lrkqo vªfjmlpbªefdeªjfkfjrjªifjfqpªlkªfktôa fksbpqjbkq)ªloªe^sbª^s^fi^_ibªil`h*rmª`lkafqflkpªlkªfksbpqbaªcrkapª%plªqe^qªlrq * ciltpªarofkdªòfpbpª`^kª_bª`lkpqo^fkba&+ªFqªfpª_âªbklrdeªqe^qªmbkpflkªcrkapªôb îobâvªfksbpqfkdªfkªebadbªcrkap+ªQebªkbbaªfpªqlªfkprobªqe^qªebadbªcrkapªtfiiª`lk* qfkrbªqlª_bªîiltbaªqlªc^fiªtfqelrqªmr_if`ªprmmloq+ 33 Jloblsbo)ªpelriaªiôdboª_^khpª_bªjlobªqlrdeivªobdri^qbaªqe^kªpjîiboª_^khp) loªklk*_^khªfkqbojbafôfbp)ªprèª^pªjlkbvªjôhbqªcrkap)ªqefpªqllªtlriaªibâªql _lrkaôvªmol_ibjp)ªtfqeªlrqtôapªciltpªqlªqebªibppªobdri^qbaªfkªdllaªqfjbpªlcc * pbqª_vª^ªobsbopbªorpeªarofkdªm^kf`p+ Qebªlqeboªj^fkªfpprbªfpªqebªfk`bkqfsbªcloªfkqbojbafôfbpª`^rdeqªtfqefkªqebªobd * ri^qlovª_lrkaôvªqlªbpq^_ifpeª^ppl`f^qbaªbkqfqfbpªlrqpfab)ªqlªtefèª_rpfkbppª`^kª_b

33 J^v_bªqebªkbbaªfpªklqªplªjrèªqlªobdri^qbªebadbªcrkap)ª_rqªqlªifjfqªqebªbuqbkqªqlªtefèªmbkpflk crkapª^kaªifcbªfkpro^k`bª`ljm^kfbpª`^kªfksbpqªfkªqebj+ 74 The Fundamental Principles of Financial Regulation qo^kpcbooba+ªQefpªfpª^kªl_sflrpªobpmlkpbªcloªqebªobdri^qba+ªPlªfqªt^pªpromofpfkd)ª^q ib^pqªfkªobqolpmb`q)ªqe^qªobdri^qlop,prmbo sfplopª^mmbôbaªqlªe^sbª_bbkªlcqbkªibpp qe^kªcriivª^mmofpba)ªfkª/--3,4)ªlcªqebªabsbilmjbkq)ª^kaªfjmif`^qflkp)ªlcªqebªè^fk lcª^ppl`f^qbªbkqfqfbpªqe^qª_^khpªeâªpbqªrmªcloªqefpªmromlpb+ªPljbªlcªqebpbªbkqfqfbp tbobªibdîivªpbmô^qb)ª_rqªobj^fkbaªobmrq^qflkîivª`lkkb`qba+ªFkªqe^qª`^pbªeltªcô tfii)ªloª`^k)ªqebª_^khªtfqefkªqebªobdri^qlovªpvpqbjªîiltªfqp)ªibdîivªpbmô^qb)ª^ppl* `f^qbªlrqpfabªqlªc^fi<ªFcªqebª^kptboªpelriaª_bªqe^qªfqªj^vªklqªcbbiª^_ibªqlªalªpl)ªqebk qebªofphpªe^sbªklqªobîivª_bbkªqo^kpcboobaªlccªqebª_î^k`bªpebbq+ Qebpbªmol_ibjpªlcªpbqqfkd)ª^kaªmlif`fkd)ªqebªobdri^qlo vª_lrkaôvªôbªobîª^ka pbsbob+ªQebobªôbªklªb^pvª^kptbop+ª?rqªmboe^mpªqebªcfopqªpqbmªqltôapªobplisfkdªprè mol_ibjpªbccb`qfsbivªfpªqlª_bª^tôbªlcªqebj+ª>ªdrfafkdªmofk`fmibªtlriaª_bªqlªabpfdk qebªfkqboc^`bª_bqtbbkªqebªobdri^qbaª^kaªqebªrkobdri^qbaªfkªprèª^ªt^vªqe^qªqeb obpriqfkdªfk`bkqfsbªqlªpefcqª_rpfkbppªfkqlªrkobdri^qbaªè^kkbip)ª_b`^rpbªlcªobdri^ * qflk)ªt^pªplªiltªqe^qªfqªkbsboª_b`^jbªpvpqbjf`+ªMboe^mpªlkbª`lkìrpflkªcoljªqefp fpªqe^qªobdri^qflkªpelriaª_bªabpfdkbaªlkivªqlª_fqbªl``^pflkîiv +ªFcªpl)ªqebªqfjb tebkªfqªpelriaª_fqbªfp)ªprobiv )ªarofkdªmboflapªlcªlmqfjfpj)ªofph*pbbhfkdª^kaªo^mfa òbafqªbum^kpflk)ªo^qeboªqe^kª^qªmobpbkqªtebkªobdri^qflkªqbkapªqlª_fqbªeôabpqªgrpq tebkªqebªobdri^qbaªôbªfkª^kvª`^pbªjlpqªofphª^sbopb+ Discussion and Roundtables

Session 1: Presentation of the Geneva Report (Chapters 1-3)

Gertrude Tumpel-Gugerell, Member of the Executive Board, European Central Bank, Frankfurt. Fkªlmbkfkdªqebªpbppflk) DboqorabªQrjmbi*Drdbobii lrqifkbaªqtlªòr`fîªnrbpqflkp) obi^qfkdªqlªqebª_lrkaôfbpªlcªobdri^qflk)ª^pªabîqªtfqeªfkªqebª^kkbuªlcªqebªObmloq) ^kaªqlªeltªqlªabqbojfkbªqebªofdeqªibsbiªlcªòbafq+ª

Mark Carey, Advisor, International Finance, Federal Reserve Board, Washington DC. Jôhª@ôbvªtbi`ljbaªqebªObmloq)ª_rqªklqbaªqe^qªebªabmôqbaªcoljªqebª^rqelopª^ ifqqibªfkªqebª_olâªptbbmªlcªqebªqbuq+ªFkªefpªsfbt )ªqebªObmloq)ªfkªfqpªbjme^pfp)ªafa klqªm^vªbklrdeª^qqbkqflkªqlªpbsboîªlcªqebªhbvªcb^qrobpªlcªqebª`roobkqªòfpfp)ª^ka fkªmôqf`riô)ªqe^qªfcªqebªprddbpqflkª_vªqebª^rqelopªqlªbppbkqfîivªbkofèª`^mfqîªobd* ri^qflkªt^pªcliiltba)ªtbªtlriaªklqª_bªebimfkdªlropbisbpªfkªqebªcrqrob+ª Ebªcl`rpbaªlkªqtlªj^fkªq^hb*^t^vp7ª %f& Qe^qª^ª_bqqboª_î^k`bªfpªkbbabaª_bqtbbkªqebªcl`rpªlcªqebªi^pqª/-ªvbôp fkªcfk^k`fîªobdri^qflkªtefèªe^pª`bkqobaªlkª`lkq^fkfkdªjloîªe^wôa ^kaªqebªcl`rpªlcªqebªmobsflrpªab`âbp)ª^qªib^pqªfkªqebªRkfqbaªPq^qbp) tefèªe^pª_bbkªlkª_^khªorkpª^pªqebªhbvªmol_ibj+ªFkªmob*.65-pª_^kh * fkdªòfpbp)ªqebªfkqbiib`qrîªqoâfqflk)ªqebªo^qflkîbªcloªmorabkqfîªobdr * i^qflkª^kaªprmbosfpflkªt^pªsbovªjrèªlkbª`bkqobaªlkªqebªbufpqbk`bªlc _^khªorkp+ªQebpbªibâªqlªcfobªpîbp)ªtefèªîlkdpfabªqebª`lkqo^`qflkpªfk ibkafkdªdbkbo^qba)ªe^sbªiôdbªkbd^qfsbªbuqbokîfqfbp+ªFkªqebª`roobkqªòf* pfp)ªîqelrdeªqebªmobppªalkÖqªj^hbªqefpªìbô)ª_^khªorkpªôbª^d^fkª^qªqeb `bkqobªlcªqebªpqlo v+ª@bkqoîª_^khbopªalªklqªqîhª^_lrqªqefpªjrè _b`^rpbªlcªqebªcbôªlcªtlopbkfkdªqebªòfpfpªlcª`lkcfabk`b+ª?rqªbppbkqfî* iv)ªbsbo vª_^khªqe^qªe^pªcîibkªob`bkqiv )ªbfqeboªfkª^_plirqbªc^firobªlo ^`nrfobaª^qª^ªcfob*pîbªmof`b)ªe^pªalkbªplªmob`fpbivª_b`^rpbªqebvªtbob bumbofbk`fkdª^ªhfiiboªork+ %ff& >ª`lk`bokªqe^qªlroªrkabopq^kafkdªlcªte^qª`^mfqîªobdri^qflkªalbpªfk qebª`roobkqªbksfolkjbkqªjfdeqª_bªcrka^jbkqîivªci^tba)ªfkªmôqf`riô) qe^qª`^mfqîªobdri^qflkªj^vªj^hbªqefkdpªtlopbªfkª^ªtloiaªlcªorkp)ªklq _b`^rpbªlcªqebªrprîªmol*`vìf`îªôdrjbkqpª^kaªqebªmol_ibjªlcª`îf * _o^qflk)ª_rqª_b`^rpbªqebªsbo vªbufpqbk`bªlcªclojîª`^mfqîªjfkfjrjp j^vª^`qrîivªfkòb^pbªqebªifhbifellaª^kaªqebªo^qbªlcªorkpªfkª^ªpvpqbjf` bmfplab+ª @ôbvªlrqifkbaª^ªcbtªâafqflkîªmlfkqp+ªT fqeªobcbobk`bªqlªqebªqefoaªè^mqbo )ªeb

75 76 The Fundamental Principles of Financial Regulation klqbaªqe^qªqebªlccf`fîªpb`qloªkbbabaªqlªj^hbª`lkpfabo^_ibªmoldobppªlkªqebªfpprbªlc telªfpªdlfkdªqlª_bªobdri^qbaª^kaªelt +ªQebªrj_obii^ªlcªobdri^qflkªtlriaªe^sbªql _bªbum^kabaªobi^qfsbªqlªfqpªmob*òfpfpªpq^qbª_b`^rpbªlcªfkqbo `lkkb`qbakbpp+ª?rq)ªeb ôdrba)ªklªlkbªe^pªobîivªqelrdeqªfkªdob^qªabq^fiª^_lrqªtevªqefpªpelriaª_bªqeb `^pb+ªEbªtbi`ljbaªqebªObmloqªfkªj^hfkdª^ªpqôqªlkªqebpbªfpprbp+ª Lkªqebªfpprbªlcªj^òlªmorabkqfîªobdri^qflkª^kaªprmbo sfpflk)ªebª^dobbaªqe^q qefpªt^pªpljbqefkdªqe^qªtlriaªkbbaªqlª_bªfksbpqbaªfk)ª_rqªklqbaªqe^q)ª^qªqeb CbaboîªObpbosb)ªqebobªt^pªklªlkbªtelªhkbtªeltªqlªalªqefp+ª>pª^ªobpriq)ªqebªCba tlriaª_bªo^qeboª`lk`bokbaªfcªfqªqelrdeqªqebªtloiaªt^pªobivfkdªlkªfqpª^_fifqvªqlªal qefpªtbiiªfkªqebªkbuqªcbtªvbôp+ªFksbpqjbkqªtlriaª_bªkbbabaªqlªibôkªeltªqlªal qefpªtbii)ª_rqªfcªpq^_fifqvªt^pªdlfkdªqlª_bªbkqfobivªabmbkabkqªlkªqebª^_fifqvªlcª^ª`bk* qoîª_^khªqlªalªqefpªtbii)ªqefpªtlriaªjlpqª`boq^fkivª_bª^ªplro `bªlcª`lk`bok+ 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Robert Reoch, Director, New College Capital Ltd, London. 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Session 2: General Discussion

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SESSION 3: Presentation of the Geneva Report (Chapters 4-7)

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Session IV: General Discussion

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>_obr)ªA+ª^kaªJ+ªH+ª?orkkbojbfbo )ª%/--0&)ªÖ?r__ibpª^kaª@o^pebpÖ)ª B`lkljbqof`^) 4.%.&)ª.40*/-1+ >èôv^)ªS+ª^kaªJ+ªOfèôaplk)ª%/--6&)ª Obpqlofkd Cfk^k`fî Pq^_fifqv7 Elt ql Obm^fo ^ C^fiba Pvpqbj)ªGlekªTfibvª#ªPlkp)ªEl_lhbk)ªKbtªGbopbv+ >aof^k)ªQ +ª^kaªJ+ªH+ª?orkkbojbfboª%/--5&ªÖ@lS ÔÖªtlohfkdªm^mbo )ªMofk`bqlk Rkfsbopfqvª^kaªCbaboîªObpbosbª?^khªlcªKbtªVloh+ >aof^k)ªQ +ª^kaªE+ªP+ªPefkª%/--4&ªÖIfnrfafqvª^kaªIbsbo^dbÖªcloqe`ljfkdªfkªqeb Glrokî lc Cfk^k`fî Fkqbojbaf^qflk+ >iibk)ªC +ª^kaªB+ª@ôibqqf)ª%/--5&)ªÖJôh*ql*Jôhbqª>``lrkqfkdª^kaªIfnrfafqv Mof`fkdÖ) Glrokî lc >``lrkqfkd ^ka B`lkljf`p+ ?orkkbojbfbo)ªJ+ªH+ª%/--6&ªÖAb`fmebofkdªqebªIfnrfafqvª^kaª@obafqª@orkèªlcª/--4* /--5ÖªGlrokî lc B`lkljf` Mbopmb`qfsbp)ªTfkqboª/--6)ª44*.--+ ?orkkbojbfbo)ªJ+ªH+ª^kaªP+ªK^dbiª%/--1&)ÖEbadbªCrkapª^kaªqebªQ bèklildv ?r__ibÖ)ªGlrokî lc Cfk^k`b)ª26%2&)ª/-.0*/-1-+ ?orkkbojbfbo)ªJ+ªH+ª^kaªI+E+ªMbabopbk)ª%/--6&)ªÖJôhbqªIfnrfafqvª^kaªCrkafkd IfnrfafqvÖ)ªObsfbt lc Cfk^k`fî Pqrafbp)ª//%3&+ ?rfqbo)ªT+)ª%/--4&)ªÖ@bkqoîª?^khpª^kaªCfk^k`fîª@ofpbpÖ)ªm^mboªmobpbkqbaª^qªG^`hplk Elibª@lkcbobk`b)ªlod^kfpbaª_vªqebªCbaboîªObpbo sbª?^khªlcªH^kp^pª@fqv ) >rdrpq+ ?rfqbo)ªT+)ª%/--6&)ªÖ>``lrkqfkdª^``loafkdªqlª?ô ì^vp7ªabìfkfkdªòbafqtloqefkbpp ^pª^ªplro`bªlcªmolcfqpÖ)ªlkªeqqm7,,_ildp+cq+`lj,j^sbob`lk,)ªCb_orôvª6+ª ?rfqbo)ªT+)ª^kaª>+ªPf_boq)ª%/--4&)ªÖ@bkqoîª_^khpª^pªjôhbqªj^hbopªlcªi^pqªobploqÖ) môqpª.ªqlª1)ª_ildªlkª ttt+cq+`lj,j^sbob`lk)ª>rdrpq+ @ol`hbqq)ª>+)ª%/---&)ªÖJôo vfkdªqebªjfòl*ª^kaªj^òl*morabkqfîªafjbkpflkpªlc cfk^k`fîªpq^_fifqvÖ)ªBibsbkqeªFkqbok^qflkîª@lkcbobk`bªlcª?^khfkdªPrmbo sfplop) ?^pbi)ª/-*/.ªPbmqbj_bo+ A^kfbipplk)ªG+)ªBj_obèqp)ªM+)ªDllaeôq)ª@+)ªHb^qfkd)ª@)ªJrbkkfè)ªC+ª^kaªE+ªPefk) %/--.&)ªÖ>kª>`âbjf`ªObpmlkpbªqlª?^pbiªFFÖ)ªIPBªCfk^k`fîªJôhbqpªDolrm Pmb`fîªM^mboªkl+ª.0-+ A^sfpªMlihª#ªT ôatbii)ª%/--5&)ªÖBjbodbk`vªB`lkljf`ªPq^_fifw^qflkª>`qªlcª/--5Ö) pbbªeqqm7,,ttt+amt+`lj,.1521-6,ìfbkqjbjlp,BBP>+jbjl+mac+ Abª?^kaq)ªL+ª^kaªM+ªEôqj^kk)ª%/---&)ªÖPvpqbjf`ªOfph7ª>ªProsbvÖ)ª@BMOªAfp`rppflk M^mbo)ªkl+ª/301)ªAb`bj_bo+ Cbodrplk)ªO+ªGo +)ªEôqj^kk)ªM +)ªM^kbqq^)ªC +)ªMloqbp)ªO+ª^kaªA+ªI^pqbo )ª%/--4&) ÖFkqbok^qflkîªCfk^k`fîªPq^_fifqvÖ)ªDbkbs^ Obmloqp lk qeb Tloia B`lkljv 6)ªF@J? %Dbkbs^&ª^kaª@BMOª%Ilkalk&+

108 References 109 abªIfp)ªP+C+)ªM^d¤p)ªG+J+ª^kaªG+ªP^rofk^)ª%/---&)ªÖ@obafqªDoltqe)ªMol_ibjªIl^kpª^ka @obafqªOfphªMolsfpflkfkdªfkªPm^fkÖ)ª?^k`lªabªBpm^k^ªT lohfkdªM^mboªKl+ª--.5+ Dllaeôq)ª@+>+B+)ª%/--5&)ªÖQebª?lrkaô vªMol_ibjªfkªCfk^k`fîªObdri^qflkÖ) K^qflkî Fkpqfqrqb B`lkljf` Obsfbt)ªKl+ª/-3)ªL`ql_bo+ Dllaeôq)ª@+>+B+)ª%/--6&)ª Qeb Obdri^qlov Obpmlkpb ql qeb Cfk^k`fî @ofpfp)ªBatôa Bidô+ Dllaeôq)ª@+>+B+)ª%cloqe`ljfkd&)ª Qeb Bôiv Efpqlov lc qeb ?^pbi @ljjfqqbb lk ?^khfkd Prmbosfpflk+ Dllaeôq)ª@+>+B+)ªPrkfo^ka)ªM +ª^kaªA+M +ªQpljl`lp)ª%/--1&)ªÖ>ªJlabiªqlª>kîvpb Cfk^k`fîªCo^dfifqv7ª>mmif`^qflkpÖ)ªGlrokî lc Cfk^k`fî Pq^_fifqv)ª.)ª.*0-+ª Dllaeôq)ª@+>+B+)ªPrkfo^ka)ªM +ª^kaªA+M+ªQpljl`lp)ª%/--3^&)ªÖ>ªJlabiªqlª>kîvpb Cfk^k`fîªCo^dfifqvÖ)ªB`lkljf` Qeblov)ª/4)ª.-4*.1/+ Dllaeôq)ª@+>+B+)ªPrkfo^ka)ªM+ª^kaªA+M+ªQpljl`lp)ª%/--3_&)ªÖ>ªQfjbªPbofbpª>kîvpfp lcªCfk^k`fîªCo^dfifqvªfkªqebªRHª?^khfkdªPvpqbjÖ)ª >kkîp lc Cfk^k`b)ª/)ª.*/.+ Ebiitfd)ªJ+)ª%.662&)ªÖPvpqbjf`ª>pmb`qpªlcªOfphªJ^k^dbjbkqªfkª?^khfkdª^ka Cfk^k`bÖ)ªPètbfwbofpèbªWbfqpèofcqªcÎoªS lihptfoqpè^cqªrkaªPq^qfpqfh,Ptfpp Glrokî lc B`lkljf`p ^ka Pq^qfpqf`p .0.)ª4/0*4048ª eqqm7,,ttt+pgbp+è,m^mbop,.662* FS*6+mac Erboq^p)ªQ+)ª%/--5&)ªÖQebªPrmbo sfpflkªlcªCfk^k`fîªPbo sf`bp7ªTe^qÖpªkbuq<Ö)ªpmbbè dfsbkª^qª./qeª>kkrîª??>ª?^khfkdªPrmbo sfpflkª@lkcbobk`b)ª/5ªL`ql_bo+ Ermhbp)ªB+)ª%/--1&)ªÖMolqb`qªcrk`qflkp)ªklqªfkpqfqrqflkpÖ)ª Qeb Cfk^k`fî Obdri^qlo) Sli+ª6+ Gfjfkbw)ªD+ª^kaªG+ªP^rofk^)ª%/--3&)ªÖ@obafqª@vìbp)ª@obafqªOfphª^kaªMorabkqfî Obdri^qflkÖ)ªFkqbok^qflkî Glrokî lc @bkqoî ?^khfkd)ª0ª%/&)ª%Grkb&)ª32*65+ Hlqifhlcc)ªI+)ªJbeoifkd)ªM +ª^kaª>+ªJfikb)ª%/--5&)ªÖOb`^mfqîfpfkdªqebª_^khpªfpªklq bklrdeÖ)ªcq+`lj,b`lkljfpqpclorj)ª%L`ql_boª/3&+ I^kll)ªH+)ª%/--5&)ªÖ@lkòbqbªPqbmpªqltôapªJlobªFkqbdo^qbaªCfk^k`fîªLsbopfdeq7 QebªBRÖpªMlif`vªObpmlkpbªqlªqebª@ofpfpÖ)ª@BMPªQ ^phªClo`bªObmloq)ª.ªAb`bj_bo+ Jloofp)ªP+ª^kaªE+ªP+ªPefkª%/--5&ªÖCfk^k`fîªObdri^qflkªfkª^ªPvpqbjª@lkqbuqÖ ?ollhfkdp M^mbop lk B`lkljf` >`qfsfqv)ªcloqe`ljfkd Krd¤b)ªG+ª^kaªMbop^ra)ª>+A+)ª%/--3&)ªÖObabpfdkfkdªObdri^qflkªlcªMbkpflkpª^ka LqeboªCfk^k`fîªMolar`qpÖ)ªLucloa Obsfbt lc B`lkljf` Mlif`v)ª//)ª%.&)ªmmª33*44+ Mbolqqf)ªB+ª^kaªG+ªPrôbw)ª%/--/&)ªÖI^pqª?^khªPq^kafkd7ªTe^qªAlªFªD^fkªfcªVlrªC^fi<Ö) Brolmb^k B`lkljf` Obsfbt)ªSli+ª13)ªmmª.266*.3//+ Mbolqqf)ªB+ª^kaªG+ªPrôbw)ª%/--6&)ªÖIfnrfafqvªFkpro^k`bªcloªPvpqbjf`ª@ofpbpÖ)ª Mlif`v Fkpfdeq Kl+ª0.)ª@BMO)ª%Cb_orôv&+ Mbop^ra)ª>+)ª%/---&)ªÖPbkafkdªqebªEboaªLccªqebª@ifccªBadb7ªQebªAfpqro_fkd Fkqbo^`qflkª?bqtbbkªEboafkdª^kaªJôhbq*PbkpfqfsbªOfphªJ^k^dbjbkq Mo^`qf`bpÖ)ªQeb Glrokî lc Ofph Cfk^k`b)ªSli+ª/)ª%.&)ªmmª26*32+ Mbop^ra)ª>+)ª%/--5^&)ªÖOb^plkªtfqeªqebªjbppbkdbo8ªalkÖqªpellqªefj7ªsîrbª^``lrkq* fkd)ªofphªj^k^dbjbkqª^kaªcfk^k`fîªpvpqbjªobpfifbk`bÖ)ªS lubr+lod)ª./ªL`ql_bo+ Mbop^ra)ª>+)ª%/--5_&)ªÖKbtªqtfpqªlkªjôhbqªqlªjôhbqªpqfopªab_^qbÖ)ªCfk^k`fîªQfjbp) Klsbj_boª0-+ Mbop^ra)ª>+)ª%/--5`&)ªÖObdri^qflk)ªsîr^qflkª^kaªpvpqbjf`ªifnrfafqvÖ)ª Cfk^k`fî Pq^_fifqv Obsfbt)ªKl+ª./+ Obmriil)ªO+)ªP^rofk^)ªG+ª^kaª@+ªQ orèôqbª%/--6&)ª]Jfqfd^qfkdªqebªMol`vìf`îfqvªlc ?^pbiªFF$)ªfkªJ+ªAbt^qofmlkqªbqªî+)ªbap+)ª J^òlb`lkljf` Pq^_fifqv ^ka Cfk^k`fî Obdri^qflk7 Hbv Fpprbp clo qeb D/-)ª@BMO+ 110 The Fundamental Principles of Financial Regulation

Obpqlv)ªC+)ª%/--5&)ªÖQebªPr_*mofjbª@ofpfp7ªPljbªIbpplkpªcloªCfk^k`fîªPrmbo sfplopÖ) @ljfpf‰kªK^`flkîªabiªJbo `âlªabªS îlobp)ªJlkldo^meªkl+ª0.)ªGriv )ªpbb eqqm7,,ttt+`kjs+bp,mr_if`^`flkbp,JLK/--5\0.\b+mac+ Olekbo)ªJ+ª^kaªQ +ªPebmebôa*T îtvk)ª%/---&)ªÖBnrfqvª^qªOfph7ª^kªîqbok^qfsb ^mmol^èªqlªpbqqfkdªobdri^qlo vª`^mfqîªpq^kaôapªcloªfkqbok^qflkîivª^`qfsb cfojpÖ)ªFC@FªOfphªFkpqfqrqb+ Pbdlsf^kl)ªJ+ª^kaª@+ªDllaeôq)ª%/--6&)ªÖ?^khfkdªPq^_fifqvªJb^probpÖ)ªFJCªTlohfkd M^mboª-6,-1)ª%T^pefkdqlk7ªFkqbok^qflkîªJlkbqôvªCrka&+ Pefk)ªE+ªP+ª%/--6&ªÖObcib`qflkpªlkªKloqebokªOl`h7ªªqebª?^khªOrkªqe^qªEboîabaªqeb Dil_îªCfk^k`fîª@ofpfpÖ)ªGlrokî lc B`lkljf` Mbopmb`qfsbp)ªTfkqboª/--6)ª.-.*.2+ RPªAbmôqjbkqªlcªqebªQ ob^prov)ª%/--5&)ªÖ?irbmofkqªcloª^ªJlabokfwbaªCfk^k`fî Obdri^qlovªPqor`qrobÖ)ªeqqm7,,ttt+qob^p+dls,mobpp,obib^pbp,obmloqp,?irbmofkq+mac+