Abstract and Keywords
The most serious global banking crisis in living memory has given rise to one of the most substantial changes in the regulatory regime of banks. While not all central banks have responsibility for regulation, because they are almost universally responsible for systemic stability, they have an interest in bank regulation. Two core objectives of regulation are discussed: lowering the probability of bank failures and minimizing the social costs of failures that do occur. The underlying culture of banking creates business standards and employee attitudes and behavior. There are limits to what regulation can achieve if the underlying cultures of regulated firms are hazardous. There are limits to what can be achieved through detailed, prescriptive, and complex rules, and when, because of what is termed the endogeneity problem, rules escalation raises issues of proportionality, a case is made for banking culture to become a supervisory issue.
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