Systemic Risk and Optimal Regulatory Architecture

25 Pages Posted: 16 Aug 2011

See all articles by Marco A. Espinosa-Vega

Marco A. Espinosa-Vega

International Monetary Fund (IMF)

Charles M. Kahn

University of Illinois, Urbana-Champaign; Feseral Reserve Bank of Saint Louis; Bank of Canada

Juan A. Solé

International Monetary Fund (IMF)

Rafael Matta

SKEMA Business School - Université Côte d'Azur

Date Written: August 2011

Abstract

Until the recent financial crisis, the safety and soundness of financial institutions was assessed from the perspective of the individual institution. The financial crisis highlighted the need to take systemic externalities seriously when rethinking prudential oversight and the regulatory architecture. Current financial reform legislation worldwide reflects this intent. However, these reforms have overlooked the need to also consider regulatory agencies’ forbearance and information sharing incentives. In a political economy model that explicitly accounts for systemic connectedness, and regulators’ incentives, we show that under an expanded mandate to explicitly oversee systemic risk, regulators would be more forbearing towards systemically important institutions. We also show that when some regulators have access to information regarding an institutions’ degree of systemic importance, these regulators may have little incentive to gather and share it with other regulators. These findings suggest that (and we show conditions under which) a unified regulatory arrangement can reduce the degree of systemic risk vis-á-vis a multiple regulatory arrangement.

Suggested Citation

Espinosa-Vega, Marco A. and Kahn, Charles M. and Sole, Juan A. and Matta, Rafael, Systemic Risk and Optimal Regulatory Architecture (August 2011). IMF Working Papers, Vol. , pp. 1-24, 2011. Available at SSRN: https://ssrn.com/abstract=1910496

Marco A. Espinosa-Vega (Contact Author)

International Monetary Fund (IMF) ( email )

700 19th Street NW
Washington, DC 20431
United States
202-623-8589 (Phone)
202-623-4311 (Fax)

Charles M. Kahn

University of Illinois, Urbana-Champaign ( email )

Department of Finance
340 Wohlers Hall
Champaign, IL 61820
United States

HOME PAGE: http://kahnfrance.com/cmk/

Feseral Reserve Bank of Saint Louis

411 Locust St
Saint Louis, MO 63011
United States

Bank of Canada

234 Wellington Street
Ontario, Ottawa K1A 0G9
Canada

Juan A. Sole

International Monetary Fund (IMF) ( email )

700 19th Street N.W.
Washington, DC 20431
United States

Rafael Matta

SKEMA Business School - Université Côte d'Azur ( email )

60 rue Dostoïevski
Sophia Antipolis, 06902
France

HOME PAGE: http://https://sites.google.com/site/almeidadamatta/

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