Doctoral thesis

The Economic Theory of Bank Regulation and the Redesign of Switzerland’s Lender of Last Resort Regime for the Twenty-First Century


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Thèse de doctorat: Université de Fribourg, 2017

English In the aftermath of the 2007–2009 financial crisis, several regulatory measures have been proposed and implemented in the banking sector. However, these regulations are the subject of ongoing debate because there is no consensus in academia regarding why banks are regulated. In addition, these regulations do not definitively exclude the possibility that a systemically important bank in Switzerland (or elsewhere) will receive emergency liquidity assistance by the central bank as the lender of last resort in the future. Thus, further consideration is needed regarding the lender of last resort because the financial crisis of 2007–2009 has underscored the important role of this type of lender in restoring financial stability. Therefore, the aims of this thesis are to elucidate a comprehensive economic theory of bank regulation, on the one hand, and a well-designed lender of last resort scheme for Switzerland for the twenty-first century, on the other. The economic theory of bank regulation draws upon the economic theory of regulation and the financial intermediation theory of banking. We extend the micro-based approach with a macro-based approach and develop an alternative regulatory view based on the endogenous nature of money and credit. Moreover, we elaborate a novel systematisation scheme to improve classification in bank regulation as an integrated part of our theory. In light of these schemes, we analyse and suggest reforms to current bank regulations because they fail to address several problems (such as the risk manipulation associated with risk-weighted capital regulation). Furthermore, we develop an alternative regulatory proposal based on the main causes of the 2007–2009 crisis. To redesign a potential lender of last resort scheme for Switzerland for the twenty-first century, we analyse the nature of the lender of last resort and conduct a literature review of the different schools of thought. We thereby introduce two new schools of thought. Further, we analyse the history of the lender of last resort in Switzerland and empirically investigate its role in the 2007–2009 Union Bank of Switzerland (UBS) crisis. In this connection, we elaborate a novel solvency framework as an early-warning system for central banks and regulators. Based on all these considerations, we redesign Switzerland’s lender of last resort regime for the twenty-first century. This dissertation establishes for the first time a complete and comprehensive economic theory of bank regulation in the twenty-first century and a lender of last resort regime for Switzerland that is more effective, timely, sustainable and credible than the status quo.
Faculté des sciences économiques et sociales
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