Good bye light touch? Macroeconomic resilience, banking regulation and institutions

Abstract

With the Great Crisis of 2008-2009 we have witnessed a relevant episode of macroeconomic vulnerability affecting many countries. To what extent such vulnerability has depended upon the design of light-touch (LT) banking regulation? We observe an Unpleasant Nexus (UN), i.e. that macroeconomic volatility is associated in a robust and systematic way with LT banking regulation. But the UN does not operate in a vacuum. The link between vulnerability and LT banking regulation seems representative of a more general relationship between institutional design and macroeconomic performance. Our analysis shows how various types of institutions – public, political, legal, monetary – also seem to exert an unexpected effect on resilience.