Containing Systemic Risk: Paradigm-Based Perspectives on Regulatory Reform

28 Pages Posted: 20 Apr 2016

Multiple version iconThere are 2 versions of this paper

Date Written: January 1, 2011

Abstract

Financial crises can happen for a variety of reasons: (a) nobody really understands what is going on (the collective cognition paradigm); (b) some understand better than others and take advantage of their knowledge (the asymmetric information paradigm); (c) everybody understands, but crises are a natural part of the financial landscape (the costly enforcement paradigm); or (d) everybody understands, yet no one acts because private and social interests do not coincide (the collective action paradigm). The four paradigms have different and often conflicting prudential policy implications. This paper proposes and discusses three sets of reforms that would give due weight to the insights from the collective action and collective cognition paradigms by redrawing the regulatory perimeter to internalize systemic risk without promoting dynamic regulatory arbitrage; introducing a truly systemic liquidity regulation that moves away from a purely idiosyncratic focus on maturity mismatches; and building up the supervisory function while avoiding the pitfalls of expanded official oversight.

Keywords: Debt Markets, Emerging Markets, Financial Intermediation, Banks & Banking Reform, Labor Policies

Suggested Citation

de la Torre, Augusto and Ize, Alain, Containing Systemic Risk: Paradigm-Based Perspectives on Regulatory Reform (January 1, 2011). World Bank Policy Research Working Paper No. 5523, Available at SSRN: https://ssrn.com/abstract=1736870

Augusto De la Torre (Contact Author)

Columbia University, SIPA ( email )

420 West 118th Street
New York, NY
United States

Alain Ize

World Bank ( email )

1818 H Street, NW
Washington, DC 20433
United States

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