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A framework for banking structural reform

A framework for banking structural reform

The 2007-08 crisis revealed regulatory failures that had allowed the shadow bank operating system and systemic risk to grow unchecked. This column evaluates recent proposals to reform the banking industry. Although appropriate pricing of risk should make activity restrictions redundant, there may nevertheless be complementarities between both of these approaches. Ring-fencing could make banking groups easier resolvable and for that reason lower the price of imposing market discipline.

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A framework for central banks and bank supervision

A framework for central banks and bank supervision

A fresh policy framework

Under this framework, monetary policy and the regulation of banks aim at stabilizing both inflation and the true economy. Stabilisation of the true economy consists in stabilising output fluctuations due to macroeconomic shocks and by financial instability. In the latter case, stabilisation of output fluctuations is attained by avoiding or reducing financial instability itself.

The central bank could have two instruments at its disposal:

(a) the short-term interest and