Goodhart on how to prevent another banking crisis
March 28, 2012
Posted by on
Charles Goodhart and Enrico Perotti have an interesting VOX note on “Preventive macro prudential policy”. They suggest a five step PCA-like policy response with emphasis on liquidity and punitive charges for non-compliance with the Net Stable Funding ratio. National supervisors should be empowered to charge “prudential risk surcharges” on the gap between the banks’ current liquidity position and the new Basel III norms.
I am not so sure about the novelty of this, or how it would work. It resembles the old PCA framework, although transferred to a liquidity framework. Still interesting to read and could form the basis for some supplementary PCA reactions to the current capital based system.
For a review of the US experience with their PCA system during the latest crisis, see this report from the US Financial Stability Oversight Council. It was issued late 2011, but is still relevant for the ongoing discussion on how to prevent another banking crisis.