Future Financial Regulation: Two Simple Rules to Prevent AIG-like Blowups Without Hampering Economic Growth; Summary
This paper was written by Romain Ranciere and Aaron Tornell and it proposes a couple of regulations that would be helpful for preventing future financial crises similar to the one we are experiencing today. The regulation of the financial industry carries a great degree of exigency due to the economic crisis whose’ epicenter was in the United States. This paper summarizes the two ways in which financial derivatives can be regulated to ensure market efficiency and transparency. The authors argue that financial regulation of derivative markets should occur and that the regulations should be simple and act as facilitators to the free market as opposed to stifling economic growth.
The two rules that are proposed are,” 1) Financial Derivatives should only be traded through public exchanges and 2) Large financial institutions would finance themselves with only with equity, deposits and standard debt contracts.” The creation of financial derivative markets would increase liquidity of derivatives so that we would not be in this illiquid situation and there would not be such asymmetrical information as we have today. The second financing rule would limit the sources of funds in the form of unorthodox funding but would have positive benefits in the form of limiting the amount of insurance type contracts without restraints. Many off balance sheet activities would be reduced if these rules where implemented according to Tornell and Ranciere and they would do so with limited market interference by actually increasing market efficiency.
Question: What do you think about the notion that in order for a country to become more financially liberal its trade balance should be close to zero and its exchange rate should be close to the real exchange rate?
This paper was written by Romain Ranciere and Aaron Tornell and it proposes a couple of regulations that would be helpful for preventing future financial crises similar to the one we are experiencing today. The regulation of the financial industry carries a great degree of exigency due to the economic crisis whose’ epicenter was in the United States. This paper summarizes the two ways in which financial derivatives can be regulated to ensure market efficiency and transparency. The authors argue that financial regulation of derivative markets should occur and that the regulations should be simple and act as facilitators to the free market as opposed to stifling economic growth.
The two rules that are proposed are,” 1) Financial Derivatives should only be traded through public exchanges and 2) Large financial institutions would finance themselves with only with equity, deposits and standard debt contracts.” The creation of financial derivative markets would increase liquidity of derivatives so that we would not be in this illiquid situation and there would not be such asymmetrical information as we have today. The second financing rule would limit the sources of funds in the form of unorthodox funding but would have positive benefits in the form of limiting the amount of insurance type contracts without restraints. Many off balance sheet activities would be reduced if these rules where implemented according to Tornell and Ranciere and they would do so with limited market interference by actually increasing market efficiency.
Question: What do you think about the notion that in order for a country to become more financially liberal its trade balance should be close to zero and its exchange rate should be close to the real exchange rate?
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