Development and Finance from issue 2008/4

Katalin Mérő

Transformation of the Banking Model – The New Challenges for Banking Regulation

- Abstract -

JEL G-21

At present, when the international financial crisis triggered by the subprime crisis is still far from being over, the regulatory reform required cannot yet be fully determined, we can only begin to sketch out in broad terms its general outline. What we can say for certain is that the originate-to-distribute banking model was developed in a lax, inadequate regulatory environment. The risks borne by the securitised structured loan packages which are the essential basis of this new banking model are part of market innovations with which the regulatory authorities only began to concern themselves when it was already too late. All of the authorities' attention was taken up with the introduction and fine-tuning of the Basel II capital rules, which are in themselves strongly procyclical and too dependent on loan ratings; in the meantime they did not pay sufficient attention to working out adequate rules for the new types of risk which were rapidly becoming widespread. It did not become clear that capital regulation in general, and therefore naturally the Basel II capital regulation, is not at all suitable for the regulation of the newly developed banking model.


Katalin Mérő, PhD, Managing Director (Hungarian Financial Supervisory Authority)

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