ABSTRACT
Financial innovation and stability are difficult to balance. The financial system in the US is the epitome of this difficulty. Ranked first in the Financial Development Index of the World Economic Forum 2012 indexes of non-financial services and financial markets, it is only ranked 38th overall for financial stability (World Economic Forum 2012). The World Economic Forum highlighted this weakness but pointed out that the US improved its ranking for overall banking stability (40th). Statistics from the World Bank also show that in 2009-12, the US had a high ratio of non-performing loans to total gross loans, indicating financial instability. However, this ratio has improved in subsequent years. Undoubtedly, the US suffered financial instability during the financial crisis of 2007-9 since it was at the core of the crisis. Although the American financial regulatory system is complex and fragmented, it is heavily regulated within the banking sector. This chapter studies the roles of shadow banking and securitisation on financial stability as well as important macro-prudential regulatory issues. From a micro-prudential perspective, it is submitted that the Federal Reserve can do more to link monetary policy with micro-prudential regulation. It is also submitted that political influence and lobbying by American politicians have had an impact on the financial regulatory architecture in the US. The pendulum has swung from independent agencies towards more power to politicians in financial regulation after the financial crisis of 2007-9. Whilst banking is always political to the extent that banks are fundamental to a country’s economy, countries such as the US and UK, with large financial sectors, will need political will to make changes for the benefit of society at an international level. Jurisdictional competition for financial services means that regulation of the shadow banking sector remains unlikely since co-operation at the international level remains a real difficulty. Other methods of improving financial stability will thus be investigated in this chapter.
