Financial Systems, Crises and Regulation

Abstract

This chapter of the forthcoming Oxford Handbook of Financial Regulation considers, in broad historical perspective and also with respect to the global financial crisis, why financial systems are crisis-prone and the relationship between financial crises and regulation. It begins with an overview of financial crises generally, and then considers both the historical and potential future role of regulation in financial crises. It discusses various theories of the roots of financial crises (cognitive error, moral hazard, information asymmetry, agency costs, trust, and complications of measurement and specification), as well as relevant policy measures (governance reforms, bank capital requirements, capital controls, and the role of the lender of last resort).

Keywords: crises, regulation, financial crisis, crashes market failure, regulatory license, moral hazard, bank capital, lender of the last resort

JEL Classification: B25, F30, G18, N00, N20, O16, P16