Discussion Paper Series 2010-E-18

Financial Regulation Going Forward

Franklin Allen, Elena Carletti

The financial sector is heavily regulated in order to prevent financial crises. The recent crisis showed how ineffective this regulation and other types of government intervention were in achieving this aim. We argue that the crisis was primarily caused by housing price bubbles. These occurred because of too loose monetary policies and the easy availability of credit resulting from the build up of large foreign exchange reserves by Asian central banks. A number of regulatory reforms are suggested. It is also argued that central banks need to have more checks and balances. Finally, the international financial architecture needs to be changed so that Asian countries do not feel the need to accumulate large foreign exchange reserves.

Keywords: Bubbles; Monetary Policy; Global Imbalances

Views expressed in the paper are those of the authors and do not necessarily reflect those of the Bank of Japan or Institute for Monetary and Economic Studies.

Copyright © 2010 Bank of Japan All Rights Reserved.

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