Financial re-regulation at a crossroads: How the European experience strengthens the case for a radical reform built on Minsky’s approach

Abstract

The current financial and sovereign crisis is pushing European politicians and EU bureaucrats to devise new institutional and policy solutions. However, the new EU institutional framework and stricter regulatory requirements do not introduce significant changes in the laissez-faire nature of the regulatory approach. Our opinion is that the entire re-regulation process does not go to the roots of how financial fragility endogenously accumulates, and how finally it produces a crisis each time starting from the weakest part of the financial system. Analysing the European banking sectors from this perspective, we show how domestic specificities add to the limits due to risk-based regulation and supervision. We then build on Minsky’s regulatory proposals to present the skeleton of a simple alternative to the existing regulatory approach. JEL Codes: G01, G21, G28

Keywords

• financial regulation
• financial fragility
• European banks