The Interplay Among Financial Regulations, Resilience, and Growth

30 Pages Posted: 22 Feb 2018

See all articles by Franklin Allen

Franklin Allen

Imperial College London

Itay Goldstein

University of Pennsylvania - The Wharton School - Finance Department

Julapa Jagtiani

Federal Reserve Banks - Federal Reserve Bank of Philadelphia

Date Written: 2018-02-16

Abstract

Interconnectedness has been an important source of market failures, leading to the recent financial crisis. Large financial institutions tend to have similar exposures and thus exert externalities on each other through various mechanisms. Regulators have responded by putting more regulations in place with many layers of regulatory complexity, leading to ambiguity and market manipulation. Mispricing risk in complex models and arbitrage opportunities through regulatory loopholes have provided incentives for certain activities to become more concentrated in regulated entities and for other activities to move into new areas in the shadow banking system. How can we design an effective regulatory framework that would perfectly rule out bank runs and TBTF (too big to fail) and to do so without introducing incentives for financial firms to take excessive risk? It is important for financial regulations to be coordinated across regulatory entities and jurisdictions and for financial regulations to be forward looking, rather than aiming to address problems of the past.

Keywords: financial reform, capital regulations, liquidity regulations, too big to fail, living wills, Dodd–Frank Wall Street Reform and Consumer Protection Act, financial stability, interconnectedness

JEL Classification: G12, G18, G21, G28

Suggested Citation

Allen, Franklin and Goldstein, Itay and Jagtiani, Julapa, The Interplay Among Financial Regulations, Resilience, and Growth (2018-02-16). FRB of Philadelphia Working Paper No. 18-9. Available at SSRN: https://ssrn.com/abstract=3125302 or http://dx.doi.org/10.21799/frbp.wp.2018.09

Franklin Allen (Contact Author)

Imperial College London ( email )

South Kensington Campus
Exhibition Road
London, Greater London SW7 2AZ
United Kingdom

Itay Goldstein

University of Pennsylvania - The Wharton School - Finance Department ( email )

The Wharton School
3620 Locust Walk
Philadelphia, PA 19104
United States
215-746-0499 (Phone)

Julapa Jagtiani

Federal Reserve Banks - Federal Reserve Bank of Philadelphia

Ten Independence Mall
Philadelphia, PA 19106-1574
United States

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