Rethinking banking supervision and the SSM perspective

Abstract

If bank services provide positive externalities to society, then not all taxpayer risk should be removed. • Regulation and supervision should aim at balancing the risks and benefits of banking, taking into account all externalities involved. The correct solution is not one in which all taxpayer risk is removed. • Society should be put in a position to express more explicitly its preference as to where that balance is located. • We need proxies for bank risk and stability, providing a yardstick for setting supervisory goals and measuring performance. • Evidence is needed on the interconnections and feedbacks between banks and the economy.