• Henry Penikas




The 2020 pandemic is likely to result in massive credit defaults. Regulators assure us that banks are sufficiently stable. However, opponents claim that regulation is lax, that it must be tightened and a supranational regulator is vitally needed. To resolve this debate, we return to the basics of the modern banking system. We analyze the evolution of micro- and macroprudential regulation, particularly touching on systemic risk. We find the solution at the intersection of von Hayek’s (1929) theory of full reserve requirement for sight deposits and Ostrom’s (2009) theory of polycentricity, which proves more efficient to optimally use common-pool resources. We elaborate on Selmier’s (2016) watershed-driven recommendations to govern financial markets and extend them to a traffic flow analogy. We conclude with operational recommendations for existing prudential banking regulation revision. We provide additional justification for the need of a full reserve system. This allows to abandon state deposit insurance systems with chronic budget deficits.


Acharya, V. V. (2009): “A theory of systemic risk and design of prudential bank.” Journal of Financial Stability, 5, 224-255.

Acharya, V. V., Sundaram, R. K., & John, K. (2004, March 14): On the Capital-Structure Implications of Bankruptcy Codes. Retrieved from http://facultyresearch.london.edu/docs/capital_structure.pdf

Adams, J. (1985): Risk and Freedom. The record of road safety regulation (1st ed.). Nottingham, UK: The Bottesford Press.

Admati, A., & Hellwig, M. (2013): Bankers’ New Clothes: What’s Wrong with Banking and What to Do about It. Princeton University Press.

Agénor, P.-R., & da Silva, L. (2017): “Cyclically adjusted provisions and financial stability.” Journal of Financial Stability, 28, 143-162. doi:10.1016/j.jfs.2016.12.009

Agliari, A., Böhm, V., & Pecora, N. (2020): “Endogenous cycles from income diversity, capital ownership, and differential savings.” Chaos, Solitions and Fractals, 130, https://doi.org/10.1016/j.chaos.2019.109435

Altman, E., Haldeman, R., & Narayanan, P. (1977): “ZETA Analysis: A New Model to Identify Bankruptcy Risk of Corporations.” Journal of Banking and Finance, 1, 29-54.

Aramonte, S., & Avalos, F. (2020, July 01): Corporate credit markets after the initial pandemic shock. Retrieved from BIS Bulletin No 26: https://www.bis.org/publ/bisbull26.htm

Avgouleas, E. (2000): “The Harmonisation of Rules of Conduct in EU Financial Markets: Economic Analysis, Subsidiarity and Investor Protection.” European Law Journal, 6(1), pp. 72-92.

Avgouleas, E., & Cullen, J. (2014): “Market discipline and EU corporate governance reform in the banking sector: merits, fallacies, and cognitive boundaries.” Journal of Law and Society, 41(1), 28-50.

BCBS. (2006, June 30): “International Convergence of Capital Measurement and Capital Standards. A Revised Framework.” Comprehensive Version. Basel. Retrieved from http://bis.org/publ/bcbs128.htm

— (2010, July 01): “Countercyclical capital buffer proposal.” Basel: BIS. Retrieved September 24, 2019, from http://bis.org/publ/bcbs172.htm

— (2013, October 15): “Basel III Regulatory Consistency Assessment Programme (RCAP).” Basel: BIS. Retrieved September 24, 2019, from http://www.bis.org/publ/bcbs264.htm

— (2014, December): Regulatory Consistency Assessment Programme (RCAP): Assessment of Basel III regulations – European Union. Retrieved from Basel Committee on Banking Supervision Website: https://www.bis.org/bcbs/publ/d300.pdf

— (2016, January 14): “Minimum capital requirements for market risk.” Basel: BIS. Retrieved September 24, 2019, from https://www.bis.org/bcbs/publ/d352.htm

— (2017, December 7): “Basel III: Finalising post-crisis reforms. Basel.” Retrieved November 12, 2018, from https://www.bis.org/bcbs/publ/d424.htm

— (2019, November 27): Guiding principles for the operationalisation of a sectoral countercyclical capital buffer. Retrieved January 07, 2020, from Basel Committee on Banking Supervision Website: https://www.bis.org/bcbs/publ/d487.htm

— (2020, April 03): Basel Committee and IOSCO announce deferral of final implementation phases of the margin requirements for non-centrally cleared derivatives. Retrieved from Basel Committee on Banking Supervision Website: https://www.bis.org/press/p200403a.htm

Bird, R. N. (2009): Junction Design. In K. J. Button, & D. A. Henshe, Handbook of Transport Systems and Traffic Control. Bingley: Emerald Group Publishing Limited.

BIS. (2020, February 19): Measuring the effectiveness of macroprudential policies using supervisory bank-level data. Retrieved from Bank for International Settlements (Asian Office) Research And Publications: https://www.bis.org/publ/bppdf/bispap110.htm

Blatt, J. M. (1983): “Economic policy and endogenous cycle.” Journal of Post Keynesian Economics, V(4), 635-647.

Blinkin, M., & Reshetova, E. (2013): Road Traffic Security: History, International Experience, Core Institutes. Moscow: Publishing House of the National Research University Higher School of Economics.

Borio, C. (2020, June 30): The prudential response to the Covid-19 crisis. Retrieved from Speech on the occasion of the Bank’s Annual General Meeting: https://www.bis.org/speeches/sp200630a.pdf

Button, K. J., & Hensher, D. A. (Eds.) (2009): Handbook of Transport Systems and Traffic Control. Bingley: Emerald Group Publishing Limited.

Byres, W. (2012): “Regulatory reforms - incentives matter (can we make bankers more like pilots?).” Basel Committee. Retrieved from http://www.bis.org/speeches/sp121024.htm

Calomiris, C. W., & Haber, S. H. (2014): Fragile By Design. The Political Origins of Banking Crises and Scarce Credit. New Jersey: Princeton University Press.

Camdessus, M. (1999, May 28): International Financial and Monetary Stability: A Global Public Good? Retrieved from IMF/Research Conference “Key Issues in Reform of the International Monetary and Financial System”: https://www.imf.org/en/News/Articles/2015/09/28/04/53/sp052899

Carey, M., & Gordy, M. (2003): Systematic Risk in Recoveries on Defaulted Debt. Retrieved from Federal Reserve Board, Washington.

Cathcart, L., El-jahel, L., & Jabbour, R. (2017): “Basel II: An Engine without Brakes.” Journal of Banking Regulation, 18(4), 359-74.

Chang, H.-J. (2014): Economics: The User’s Guide. Cambridge: Bloomsbury Press.

Coen, W. (2018, November 28): “Looking ahead by looking back.” Speech at the 20th International Conference of Banking Supervisors. Abu Dhabi: Basel Committee. Retrieved September 20, 2019, from https://www.bis.org/speeches/sp181128.pdf

Colacchio, G., & Davanzati, G. F. (2017): “Endogenous money, increasing returns and economic growth:Nicholas Kaldor’s contribution.” Structural Change and Economic Dynamics, 41, 79-85

Crete, R. (2016): “The Volkswagen Scandal from the Viewpoint of Corporate Governance.” European Journal of Risk Regulation, 1, 25-31.

Danielsson, J., & Jonsson, A. (2005): “Countercyclical Capital and Currency Dependence.” Financial Markets, Institutions & Instruments, 14(5), 329-348.

de Area Leao Pereira, E. J., da Silva, M. F., & Pereira, H. (2017): “Econophysics: Past and present.” Physica A, 473, 251-261.

Demetriades, P. (2012, November 01): Financial stability in Europe: a European public good. Retrieved from Fiduciary Future Cyprus 2012 Conference: https://www.centralbank.cy/en/the-governor/previous-governors/previous-governor-s-speeches/panicos-o.-demetriades/01112012

Demsetz, H. (1968): “Why regulate utilities?” Journal of Law and Economics, 55-65.

Dewatripont, M., & Tirole, J. (1994): The prudential regulation of banks. Massatsusets: MIT press.

Dewatripont, M., Rochet, J.-C., & Tirole, J. (2010): Balancing the banks. Global lessons from the financial crisis. Princeton and Oxford: Princeton University Press.

Diamond, D., & Dybvig, P. (1983): “Bank Runs, Deposit Insurance, and Liquidity.” The Journal of Political Economy, 3(91), 401-419.

Duprey, T., & Ueberfeldt, A. (2020, January 28): Managing GDP Tail Risk. Retrieved from Bank of Canada Staff Working Paper/Document de travail du personnel — 2020-03: https://www.bankofcanada.ca/wp-content/uploads/2020/01/swp2020-3.pdf

Ermolova, M., Leonidov, A., Nechitaylo, V., Penikas, H., Pilnik, N., & Serebryannikova, E. (2020): “Agent-based model of the Russian banking system: calibration for the maturity, interest rate spread, credit risk, and capital regulation.” Journal of Simulation, 10.1080/17477778.2020.1774430.

Fatica, S., Heynderickx, W., & Andrea, P. (2020, April): “Banks, debt and risk: assessing the spillovers of corporate taxes.” Economic Inquiry, 58(2), 1023-1044.

Fernandez de Lis, S., & Garcia-Herrero, A. (2010): “Dynamic Provisioning: Some Lessons from Existing Experiences.” ADBI Working Paper No. 218, 1-32. doi:10.2139/ssrn.1624750

Gillard, L. (2004): La Banque d’Amsterdam et le Florin Européen au Temps de la République Néerlandaise (1610-1820). Paris: Éditions de l’Ehess.

Goodhart, C. (2011): The Basel Committee on Banking Supervision. A History of the Early Years 1974-1997. Cambridge: Cambridge University Press.

Gordy, M., Heitfield, E., & Wu, J. (2015): “Risk-Based Regulatory Capital and the Basel Accords.” In A. Berger, P. Molyneux, & J. O. Wilson, Oxford Handbook of Banking (Second ed., pp. 550-67.). Oxford: Oxford University Press.

Gorton, G. (2012): Misunderstanding Financial Crises: Why We Don’t See Them Coming. Oxford: Oxford University Press.

Greenwood, G., & Roederer-Rynning, C. (2015): “The “Europeanization” of the Basel process: Financial harmonization between globalization and parliamentarization.” Regulation & Governance, 9, 325-338.

Haldane, A. (2009): Rethinking the financial network. Retrieved from Bank of England: http://www.bis.org/review/r090505e.pdf

Hasumi, R., Iiboshi, H., & Nakamura, D. (2018): “Trends, cycles and lost decades: Decomposition from a DSGE model with endogenous growth.” Japan and the World Economy, 46, 9-28.

Haxholdt, C., Kampmann, C., Mosekilde, E., & Sterman, J. D. (1995): “Mode-locking and entrainment of endogenous economic cycles.” System Dynamics Review, 11(3), 177-198.

Hayek, F. A. (1929): Geldtheorie und Konjunkturtheorie. Beitrage zur Konjunkturforschung, vol. 1, ed. Vienna: Springer; Osterreichisches Institue fur Konjunkturforschung. — (1974, December 11): Prize Lecture. Retrieved from NobelPrize. org. Nobel Media AB 2020: https://www.nobelprize.org/prizes/economic-sciences/1974/hayek/lecture/

Hildreth, R. (1837): The History of Banks: To Which Is Added, a Demonstration of the Ad-vantages and Necessity of Free Competition In the Business of Banking. Boston: Milliard, Gray & Company. Retrieved from https://socialsciences.mcmaster.ca/ econ/ugcm/3ll3/hildreth/bank.pdf

Hogan, T., & Johnson, K. (2016): “Alternatives to the Federal Deposit Insurance Corporation.” The Independent Review, 20(3), 433-54.

Huerta De Soto, J. (2006): Money, Bank Credit, and Economic Cycles (2nd, translated from Spanish ed.). Auburn, Alabama: Mises Institute.

Ingves, S. (2015, November 2): “From Vasa to the Basel Framework: The Dangers of Instability.” Retrieved from http://www.bis.org/speeches/sp151102.htm — (2017, June 02): “Remarks given at IADI conference on ʻDesigning an Optimal Deposit Insurance Systemʼ”. Retrieved from https://www.bis.org/speeches/sp170602.htm

Izan, H. (1984): “Corporate Distress in Australia.” Journal of Banking and Finance, 8, 303-320.

Jones, E., Beck, T., & Kneeck, P. (2018, September): Mind the Gap: Making Basel Standards Work for Developing Countries. Retrieved October 06, 2019, from https://www.geg.ox.ac.uk/sites/geg.bsg. ox.ac.uk/files/2018-09/Mind%20the%20gap%20-%20making%20Basel%20standards%20work%20for%20developing%20


Kerner, B. S. (2009): Introduction to Modern Traffic Flow Theory and Control. Berlin: Springer.

Keynes, J. M. (1936): The General Theory of Employment, Interest and Money.

Kincaid, P. (1986): The Rule of the Road. An International Guide to History and Practice. Greenwood Press.

Lall, R. (2012): “From failure to failure: The politics of international banking regulation.” Review of International Political Economy, 19(4), 609-638.

Li, S., & Marin, C. (2014): “The use of financial derivatives and risks of U.S. bank holding companies.” International Review of Financial Analysis, 35, 46-71.

Mayordomo, S., Rodriguez-Moreno, M., & Pena, J. (2014): “Derivatives holdings and systemic risk in the U.S. banking sector.” Journal of Banking and Finance, 45, 84-104.

Meuleman, E., & Vennet, R. V. (2020): “Macroprudential policy and bank systemic risk.” Journal of Financial Stability, 47.

Minsky, H. (1982): Can “It” Happen Again? New York: Routledge.

Mises, L. v. (1953): Theory of Money and Credit. Yale University Press.

Moosa, I. (2010): “Basel II as a casualty of the global financial crisis.” Journal of Banking Regulation, 11(2), 95-114.

Mordel, A. (2018, July): Prudential Liquidity Regulation in Banking—A Literature Review. Retrieved from Bank of Canada Staff Discussion Paper/Document d’analyse du personnel 2018-8: https://www.bankofcanada.ca/wp-content/uploads/2018/07/sdp2018-8.pdf

Ocampo, J. (2003): Capital Account and Counter-Cyclical Prudential Regulations in Developing Countries. Retrieved from Informes y estudios especiales series, No. 6.

Ordoñez, G. (2018): “Sustainable Shadow Banking.” American Economic Journal: Macroeconomics, 10(1), 33-56.

Ostrom, E. (2009, December 09): Prize Lecture. Retrieved from NobelPrize.org. Nobel Media AB 2020: https://www.nobelprize.org/prizes/economic-sciences/2009/ostrom/lecture/

Ostrom, V., & Ostrom, E. (1977): “Public Goods and Public Choices.” In E. Davas (Ed.), Alternatives for Delivering Public Services: Toward Improved Performance (pp. 7-49). Boulder, CO: Westview Press.

Penikas, H. (2015): “History of banking regulation as developed by the Basel Committee on banking supervision in 1974-2014” (brief overview). 28(5):. Financial Stability Journal, 28(5), 9-47.

Penikas, H. I., & Selmier II, W. T. (2013): Does Banking Regulation Cause Counterproductive Economic Dynamics? Retrieved from NRU Higher School of Economics. Series WP BRP “Economics/EC” No. 15: Does Banking Regulation Cause Counterproductive Economic Dynamics?

Pettifor, A. (2020): “Rebuild the ramshackle global financial system. Economic researchers neglect the role of financialization in global.” Nature, 582, 461.

Pfister, C. (2019): “Monnaie digitale de banque centrale: une, deux ou aucune?” Revue d’economie financiere, 115-129.

Polizatto, V. P. (1989): Prudential Regulation and Banking Supervision. Retrieved from Background paper for the 1989 World Development Report WPS 340:http://documents1.worldbank.org/curated/en/389501468764981235/pdf/multi-page.pdf

Pugliese, S. (2016): “Divergences between EU and US in the Financial Regulation: What Effects on the TTIP Negotiations.” European Journal of Risk Regulation, 7(2), 285-289. doi:10.1017/s1867299x00005699

Raybaut, A. (2014): “Toward a non-linear theory of economic fluctuations: Allais’s contribution to endogenous business cycletheory in the 1950s.” European Journal on the History of Economic Thought, 21(5), 899-919.

Reinhart, C., & Rogoff, K. (2009): This Time is Different: Eight Centuries of Financial Folly. Princeton University Press.

Repullo, R., & Saurina, J. (2012): “The Countercyclical Capital Buffer of Basel III. A Critical Assessment.” In M. Dewatripont, & X. Freixas, The Crisis Aftermath: New Regulatory Paradigms, edited by (pp. 45-67). CEPR.

Saurina, L., & Trucharte, C. (2017): The countercyclical provisions of the Banco de España 2000-2016. Madrid: Banco de España.

Schinckus, C. (2018): “Ising model, econophysics and analogies.” Physica A, 508, 95-103.

Selmier II, W. T. (2014): “Why club goods proliferated in investment finance.” In T. Oatley, & W. Winecoff (Eds.), Handbook of the International Political Economy of Monetary Relations (pp. 327-342). Cheltenham, UK: Edward Elgar Publishing. — (2016): “FERMiers required: applying watershed governance to banking and finance.” International Journal of Commons, 10(2), 1119-1143.

Selmier II, W. T., Penikas, H., & Vasilyeva, K. (2014): “Financial Risk as a Good.” Procedia Computer Science, 31, 115-123. doi:10.1016/j.procs.2014.05.251

Seta, M. D., Morellec, E., & Zucchi, F. (2020): “Short-term debt and incentives for risk-taking.” Journal of Financial Economics, 137, 179-203.

Shirakawa, M. (2012, October 14): International financial stability as a public good. Retrieved from high-level seminar, co-hosted by the Bank of Japan and the International Monetary Fund: https://www.bis.org/review/r121015c.pdf

Shleifer, A. (2012): The Failure of Judges and the Rise of Regulators. MIT Press.

Siebert, H. (2001): Cobra Effect: Where the Solution is Worse Than the Problem. Stgt: Deutsche V.-A. (DVA).

Spong, K., & Regher, K. (2012): “Kansas Banking in the 1930s: The Deposit Insurance Choice and Implications for Public Policy.” Federal Reserve Bank of Kansas City Economic Review, 3, 107-27.

Stiglitz, J. (2008, October): We Aren’t Done Yet: Comments on the Financial Crises and Bailout. Retrieved from The BerkeleyElectronic Press: http://cemi.ehess.fr/docannexe/file/2779/stiglitz.pdf

Sunaga, M. (2017): “Endogenous growth cycles with financial intermediaries and entrepreneurial innovation.” Journal of Macroeconomics, 53, 191-206.

Taleb, N. N. (2007): The Black Swan. The Impact of the Highly Improbable. New York: Random House.

Tente, N., von Westernhagen, N., & Slopek, U. (2019, October): “M-PRESS-CreditRisk: Microprudential and Macroprudential Capital Requirements for Credit Risk under Systemic Stress.” Journal of Money, Credit and Banking, 51(7), 1923-1961.

The Economist. (2020, March 12): A sea of debt. Corporate bonds and loans are at the centre of a new financial scare. Retrieved from https://www.economist.com/finance-and-economics/2020/03/12/corporate-bonds-and-loans-are-at-the-centre-of-a-new-financialscare

The Financial Times. (2010): Healthy Banking System is the Goal, not Profitable Banks. Letter signed by 20 economists. Retrieved from https://www.gsb.stanford.edu/faculty-research/excessive-leverage/healthy-banking-system-goal

Titova, Y., Penikas, H., & Gomayun, N. (2020): “The impact of hedging and trading derivatives on value, performance and risk of European banks.” Empirical Economics, 58(2), 535-565.

Véron, N. (2020, March 25): Banks in the COVID-19 turmoil: Capital relief is welcome, supervisory forbearance is not. Retrieved from Peterrson Institute for International Economics (PIIE): https://www.piie.com/blogs/realtime-economic-issues-watch/banks-covid-19-turmoil-capital-relief-welcome-supervisory

Wells, H. (2012): The Fast and The Furious: Drivers, Speed Cameras and Control in Risk Society (Human Factors in Road and Rail Transport). Surrey: Ashgate Publishing Limited.

Yunus, M. (2006, December 10): Nobel Lecture. Retrieved from NobelPrize.org. Nobel Media AB 2020: https://www.nobelprize.org/ prizes/peace/2006/yunus/26090-muhammad-yunus-nobel-lecture-2006-2/



2022-08-11 — Updated on 2023-01-03


How to Cite

Penikas, H. (2023). OPTIMAL PRUDENTIAL REGULATION OF THE BANK RISK-TAKING. REVISTA PROCESOS DE MERCADO, 19(1), 13–62. https://doi.org/10.52195/pm.v19i1.775 (Original work published August 11, 2022)