Our model captures the spirit of these dynamics, with short-run risk-taking to preserve reputation and boost returns (a credit boom) in time giving way to longer-term collective costs when the music ceases (a credit crunch). Chart 1 Price to book ratios for UK, US and European institutions(a)  Sources: Bloomberg, Thomson Datastream and Bank calculations  2.1  (a)  Chart shows the ratio of share price to book value per share. Simple averages of the ratio in each peer group are used. The chart plots the three month rolling average. (b)  Excludes Nationwide and Britannia from Major UK Banks peer group. The set up  We develop a simple framework, in the spirit of Rajan (1994), to capture these collective action failures. Rajan’s (op.cit.) model generates multiple equilibria. We use a version of the Morris and Shin (2003) “global games” framework to pin down a unique equilibrium for the coordination game among banks, which then allows an evaluation of policy options. 3  3  For other applications of the “global games” framework to banking, see inter alia, Rochet and Vives (2004) and Goldstein and Pauzner (2005). Broadly speaking, these models use the framework to pin down uniqueness in the coordination game played by the depositors of fragile banks, a la Diamond and  BIS Review 168/2010  3  The set up is as follows. Each period there is a continuum of agents, indexed by , all of whom work as financial intermediaries for a single period.
Frameworks are being established to identify and address the risks posed by global systemically important financial institutions. Make derivatives markets safer. Requirements are being put in place to foster central clearing, margin requirements, and mandatory reporting of OTC derivative trades. Transform shadow banking into resilient market-based finance. Oversight of shadow banking entities is being strengthened. The Financial Stability Board has been working to ensure that these internationally agreed regulatory reforms are implemented in a timely and consistent manner across the major jurisdictions. While gaps remain in some areas, implementation is generally proceeding well. It is time now to begin the important task of evaluating the impact of the reforms. In fact, the FSB is developing a conceptual framework for doing this. The framework aims to answer two questions: have the regulatory reforms been effective – are they achieving their intended outcomes? 1/7  BIS central bankers' speeches  what are the cumulative effects of the reforms – how have the various reforms interacted with one another, are they coherent, what are their larger social benefits and costs? This work is especially important in the current context: As memories of the crisis fade and the burden of regulatory reforms comes into sharper focus, the pressure to unwind the reforms will grow. It is important for the credibility of the reforms that their impact be objectively evaluated. It is also incumbent on us as regulators to be accountable for the substantial changes that we have put in place over the last eight years.