Abstract
We claim that we currently live in a banking regulatory bubble. We review how: i) banking intermediation theory hinges on dealing with borrower-lender asymmetry of information; ii) instead, the presence of complete information is the keystone of finance theory. Next, we document how finance theory prevailed over banking intermediation theory in shaping banking regulation: This appalling contradiction is the true culprit behind lower credit standards, mounting systemic risk in banking, and macroeconomic debt overhang. Consequently, we discuss actions that, by restoring the consistency of banking regulation with the theory of banking intermediation, would make banking sounder.
<g.ferri@lumsd.it>, Lumsa — Department of Economic and Political Science and of Modern Languages; CERBE — Center for Relationship Banking & Economics and MOFIR — Money & Finance Research.
<daris.neuberger@uni-rostock.de>, University of Rostock, Department of Economics; CERBE — Center for Relationship Banking & Economics and IFF — Institute for Financial Services. The Authors would like to thank for helpful comments Udo Reifner, Institute for Financial Services Hamburg, the University of Trento and CERBE, Rome.
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Ferri, G., Neuberger, D. (2015). The Banking Regulatory Bubble and How to Get out of It. In: Calciano, F.L., Scarano, G., Fiordelisi, F. (eds) The Restructuring of Banks and Financial Systems in the Euro Area and the Financing of SMEs. Central Issues in Contemporary Economic Theory and Policy. Palgrave Macmillan, London. https://doi.org/10.1057/9781137518736_3
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