On banking and intermediation

The purpose of this lecture is to develop a framework for the study of prudential regulation and to derive policy implications. Following a discussion of the practice of banking supervision and of the raison d'être of regulation, the paper emphasizes the importance of capital adequacy and balance sheet adjustments to shocks affecting either individual banks or the banking sector as a whole. The ideas are then applied to the policy debates on market value accounting and on the indexation of the capital requirements to the business cycle. The paper concludes with political economy questions and with a discussion of the 'too-big-to-fail' problem.