Nobel Laureate Jean Tirole Calls for Tough Rules for Banks

“We need strong rules that are going to prevent banks from gambling with taxpayers’ money,” Tirole, an economics professor at the University of Toulouse, said in an interview with Erik Schatzker on Bloomberg Television. “If they are to be bailed out, they have to be regulated.”

Royal Swedish Academy of Sciences, which forms the selection committee, said Tirole’s work on regulating powerful companies and unbalanced markets helped him win the 8 million-krona ($1.1 million) prize. The recognition the prize carries has helped previous winners bring their economic theories closer to policy making. Past laureates include Milton Friedman, James Tobin and Friedrich August von Hayek.

“Regulation isn’t about preventing firms and banks from functioning,” Tirole, 61, said. “It’s the reverse. Regulation is about the rules of the game, and also an independent enforcement of the rules of the game.”

He said it’s “too early to tell” whether banking regulations implemented since the financial crisis have worked. For him, the biggest issue is resolving the question of how to allow large banks to fail without requiring a bailout.

“Size is a complex matter because you can be a big bank that is diversified and, conversely, the smaller banks, they can fail,” he said, referring to Spain’s network of small savings banks. “It’s not only size that matters.”

Global regulators are working on a package of measures aimed at ending implicit government support to large financial firms, which includes requiring banks to hold an additional loss-absorbing buffer that can be quickly written down in a crisis.

“There have been a lot of improvements, like more emphasis on liquidity” rules, he said. “The main thing is to get banks not to take too much risk.”