Three Reflections on Banking Regulations and Cross-Border Financial Flows

Abstract

Edwin Truman discusses the incidence of banking crises and concludes that there is no reason to expect an end to financial crises in the future. Moreover, he argues that financial reforms in recent years may have had the effect of increasing the severity of those crises that will occur by preventing the occurrence of smaller crises. Second, he finds that capital controls can be of use but not as a rule for all countries in all circumstances. Although a sudden stop of capital flows often precede crises they are not the underlying cause. Instead, there is greed on the part of borrowers and lenders that turns into fear when a disturbance occurs. Thus capital flow management controls, although often desirable, are not a panacea. Moreover, the authorities may find it difficult to distinguish between good and bad types of banking flows and over time capital controls will be evaded and become distortionary. Finally, Truman explores the possibility of major countries taking into account the effect of their policies on others but is not hopeful that central banks can deviate much from the local mandates.