The Role of Policy and Banking Supervision in the Light of the Credit Crisis

Avinash D. Persaud

in Time for a Visible Hand

Published in print January 2010 | ISBN: 9780199578801
Published online February 2010 | e-ISBN: 9780191723285 | DOI:

Series: Initiative for Policy Dialogue

The Role of Policy and Banking Supervision in the Light of the Credit Crisis

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  • Macroeconomics and Monetary Economics


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Persaud provides in his chapter complementary analysis on the design of banking regulation and supervision in the light of the credit crisis. In the author's view, two fundamental flaws in financial regulation led to the biggest crisis of modern times. The first was to put market evaluations of risk at the heart of financial regulation, through external ratings and risk measures derived from market prices. The essential problem is that market prices may improperly evaluate risk in the presence of market failures. The second flaw was to assume that common standards, such as value‐accounting and risk measures are good and that diversity is bad, thus underestimating the advantages different players have to assume different risks.

Keywords: systemic risk; banking supervision; risk absorption; market evaluations of risk

Chapter.  6547 words. 

Subjects: Macroeconomics and Monetary Economics

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