and managing future crises

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This paper explains how modern developments in lending and liquidity management using short term secured lending contributed to the process of financial sector expansion prior to the financial crisis and its subsequent unwinding. It focuses upon the role of the non-regulated financial sector, and aims to assist readers to understand the answer to the commonly asked question: where has all the money gone? It draws some lessons and policy implications and identifies a number of regulatory issues emerging as the subject of debate.

We use a macroeconomic model of the euro area featuring a bank sector to study the pro-cyclical effect of the capital regulation, focusing in particular on the extra pro-cyclicality induced by Basel II relative to Basel I. Our results suggest that this incremental effect is likely modest. While this result survives a series of checks based on alternative assumptions about specification and parameters of our model, its robustness remains to be tested under more radically alternative modeling choices. We also find that the regulator could offset the extra pro-cyclicality induced by Basel II via a countercyclical capital requirements policy. Our results also suggest that banks may have incentives to accumulate countercyclical capital buffers, making this policy less relevant. However, the latter result is found to depend on the nature of the shock hitting the economy.

There is nothing more practical than a good theory. This thesis is a compilation of essays that seek to improve our understanding of law by building on new developments in economic theory, focusing on the role of psychology and morality in economic analysis of law. Essay 1 applies behavioral economics to financial regulation, challenging the notion that bounded rationality of investors implies more regulation. It argues that debiasing regulations need not be intrusive; that faulty market perceptions are best corrected through market-based solutions; that overregulation tends to cause lack of market discipline, pricing inefficiencies and problematic innovations; that regulators are also subject to imperfect rationality; and that regulatory complexity exacerbates the

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