New theories to underpin financial reform

Before 2007, financial crises were not widely studied in economics and finance. The lack of importance ascribed to financial stability and our limited knowledge of this topic were significant contributors to the crisis. This paper suggests five areas where new theories are needed. These are asset price bubbles, central bank checks and balances, global imbalances, banking regulation, and competition in financial services.

► Financial regulation failed dismally in preventing the financial crisis that started in the summer of 2007. Substantial redesign is necessary. We need new theories to form the foundation of this redesign.
► Five areas are suggested for analysis: (i) asset price bubbles; (ii) central bank checks and balances; (iii) global imbalances; (iv) banking regulation; (v) competition in financial services.
► The insights of financial economics need to be combined with those of public economics to provide a firm and widely agreed upon foundation for financial regulation.