LE QUANG Gaetan

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The crisis of 2007-08 called for a renewal of banking regulation that took the shape of a shift toward macroprudential policy. However, a comprehensive assessment of the current state of financial regulation reveals that this shift is incomplete. In particular, the notion of risk that lies at the heart of the Basel framework is still blind to extreme events. Climate risk and pandemic risk fall into this category. The purpose of this article is twofold. On the one hand, we point out why current banking regulation is not adequate to face risks whose origin is grounded outside financial markets – as is the case for both the pandemic and the climate risks –. on the other hand, we offer avenues for reforming macroprudential regulation in a way that would allow to take those risks into account.

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In the wake of the financial crisis, accounting issues have caught the attention of both economists and regulators. Fair value accounting has indeed been charged of amplifying the procyclicality of the banking system. Real effects of accounting are therefore to be taken into consideration when discussing the issues raised by the crisis. We develop a theoretical model to study what the real effects of accounting on financial institutions’ investment decision are. Doing so, we show that fair value accounting may incentivize banks to underinvest in long-term risky assets, while historical cost accounting may incentivize them to invest too much in those assets. At first sight, bank accounting thus appears as a choice between bad and worse. We show that this is not necessarily the case. More precisely, if financial institutions are subject to different accounting rules depending on their time horizon – i.e. long-sighted financial institutions are subject to historical cost accounting while shorter-sighted financial institutions are subject to fair value accounting – the inefficiencies associated with both accounting rules may be softened.

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The crisis of 2007-2008 can be interpreted as the failure of market discipline. External bailouts and unconventional monetary policies are signs of such failure. After the crisis, banking regulation has therefore undergone major changes. However, there is still a strong emphasis on market discipline. The purpose of this thesis is to study how market discipline has been reactivated in the recent period. The emphasis on transparency in financial reporting and the issue of internal bailouts are the two main avenues for the reactivation of market discipline. The first part of this thesis is thus devoted to an analysis of the relationship between financial disclosure, transparency and financial stability. In particular, we show that the relationship between these three terms is ambiguous, so that it is not possible to promote market discipline through disclosure requirements alone. In the second part of this thesis, we focus on the impact on bank behavior of the way financial information is produced, i.e. the impact of accounting standards. The third part of this thesis studies how market discipline could, or could not, be effectively implemented via regulatory requirements in terms of contingent convertible bonds (co-bonds). We show that the desire to reactivate market discipline through complex financial instruments such as CCOs is a dangerous oversight of history, as it was the complexity of finance that was at the origin of the crisis of the late 2000s.

The crisis of 2007-2008 can be interpreted as the failure of market discipline. External bailouts and unconventional monetary policies are signs of such failure. After the crisis, banking regulation has therefore undergone major changes. However, there is still a strong emphasis on market discipline. The purpose of this thesis is to study how market discipline has been reactivated in the recent period. The emphasis on transparency in financial reporting and the issue of internal bailouts are the two main avenues for the reactivation of market discipline. The first part of this thesis is thus devoted to an analysis of the relationship between financial disclosure, transparency and financial stability. In particular, we show that the relationship between these three terms is ambiguous, so that it is not possible to promote market discipline through disclosure requirements alone. In the second part of this thesis, we focus on the impact on bank behavior of the way financial information is produced, i.e. the impact of accounting standards. The third part of this thesis studies how market discipline could, or could not, be effectively implemented via regulatory requirements in terms of contingent convertible bonds (co-bonds). We show that the desire to reactivate market discipline through complex financial instruments such as CCOs is a dangerous oversight of history, as it was the complexity of finance that was at the origin of the crisis of the late 2000s.