Do Basel III and the Dodd-Frank Act Reflect the Academic Debate on Macro-Prudential Regulation

Project Start:07/2014
Researchers:Matthias Thiemann
Category: Macro Finance
Funded by:LOEWE

Since the outbreak of the financial crisis, the macro-prudential policy paradigm has gained increasing prominence (Bank of England, 2009; Hanson et al., 2011; Bernanke, 2011). However, this paradigm shift in financial regulation has not been accompanied by a consensus on the appropriate measures and policy instruments (VanHoose, 2011; Baker, 2013). Indeed, the conceptual identification of systemic risk, its measurement and corresponding regulatory instruments have been at the forefront of the academic and technocratic debates (FSB/IMF/BIS, 2009; 2011; Acharya, 2009; Acharya et al., 2010; Goodhart et al., 2011; IMF, 2011; BIS, 2012; Benoit et al., 2013). In the meantime, policy makers have been implementing first macro-prudential measures in Basel III and the Dodd-Frank Act. The goal of this research project is to understand how the measures adopted relate to the discussion in the academic literature. Given that the latter is still in flux, to which extent do the adopted measures correspond to the level of consensus and structure of disagreement in the academic literature? Using a set of bibliometric techniques, we will seek to quantitatively measure the level of consensus and disagreement in the academic and technocratic literature concerning our three subjects of analysis, namely, the concept of systemic risk, its measurement and appropriate macroprudential regulatory instruments. We will then analyze Basel III and Dodd-Frank Act to categorize their underlying positions on our subjects of analysis. In a last step, we will then map the different regulatory measures onto the academic and technocratic debate, thus making visible whether and how regulatory policies map onto the academic literature.

Starting from July 2014, we have worked on a pilot for our quantitative and qualitative work. In this pilot, we have studied the evolution of the discourse on systemic risk and macroprudential regulation for the period 1985-201, using discourse analysis and citation network analysis. We sampled the most cited sources on banking regulation and systemic risk, using google scholar (60 sources each). We have then investigated in how far these two literatures cross-reference each other and in how far their modes of analysis differ or resemble each other. The outcome of this work is forthcoming as a book chapter, and we have submitted an enlarged and substantially improved version to the working paper series of the European Association of Evolutionary Political Economy, where it is currently under review. Based on this pilot, we are now compiling a comprehensive database of the 320 most cited academic sources on systemic risk amenable to citation network analysis. From July to October, we have identified the relevant systemic risk measures, which are discussed within the academic and practitioners’ discourse. By means of a distinction based upon Hall (1993) and the IMF paper by Bisias (2012), we classified certain measures in relation to research fields (e.g.: we divided liquidity measures form network measures, etc.), with the overall aim of presenting how certain measures can finally be transformed into policy tools. This led to the construction of a figure representing different policy measures currently contemplated. From November to December, we undertook a detailed analysis of the Basel III Framework in order to identify the macro prudential policy tools. Furthermore, we identified the already „suggested“ calibration methods. Afterwards, we analyzed the European Systemic Risk (ESRB) Handbook, published in March 2014. The overall aim of the handbook is to assist macro-prudential authorities in the European Union (EU) to operationalize instruments set out in the new prudential rules for the EU banking sector. The analysis of the ESRB Handbook was of particular importance, as the ESRB relates directly to the academic discourse to explain certain systemic risk measures, and even more important, how certain measurements, suggested by Basel III, could be calibrated with certain academic ideas. These two analytical steps led to the two charts below. Since January we are thus connecting the systemic risk measures based upon our identification with quoted authors from the ESRB. Right now, we are moving from registering the data to process tracing, in order to identify when and under which conditions economists made a difference to the evolution of systemic risk measures. In order to do so, we will undertake semi-structured expert interviews with leading economists and policy makers, starting with Lord Turner at the end of February. This step, which was not originally planned is an important bridge to validate our first bibliometric results. Lastly, our work comparing academic work on the need to take regulatory measures to reduce systemic risk and regulatory steps taken to date has led to a SAFE White Paper (No. 25).


Related Published Papers

Author/sTitleYearProgram AreaKeywords
Mohamed Aldegwy, Matthias ThiemannVon mikro- zu makroprudenzieller Regulierung
Die Innenwelt der Ökonomie: Wissen, Macht und Performativität in der Wirtschaftswissenschaft (Springer)
2016 Macro Finance Banking Regulation, Systemic Risk, Formalism, Equilibrium Thinking, Discourse, Citation Network Analysis

Related Working Papers

No.Author/sTitleYearProgram AreaKeywords
138Mohamed Aldegwy, Matthias ThiemannHow Economics Got it Wrong: Formalism, Equilibrium Modelling and Pseudo-Optimization in Banking Regulatory Studies2016 Macro Finance Sociology of Finance, Optimal Regulation, Dynamic and Reliable Regulation, Banking Regulation, Financial Crisis
136Mohamed Aldegwy, Edin Ibrocevic, Matthias ThiemannUnderstanding the Shift from Micro to Macro-Prudential Thinking: A Discursive Network Analysis2016 Macro Finance Banking Regulation, Systemic Risk, Formalism, Equilibrium Thinking, Discourse, Citation Network Analysis

Related Policy Publications

The Regulation of Repo Markets: Incorporating Public Interest through a Stronger Role of Civil Society
White Paper No. 25