The Interplay between Regulations and Financial Stability

33 Pages Posted: 19 Mar 2018

See all articles by Franklin Allen

Franklin Allen

Imperial College London

Xian Gu

Durham University Business School

Multiple version iconThere are 2 versions of this paper

Date Written: March 9, 2018

Abstract

The crisis demonstrated that microprudential regulation focusing on the risks taken by individual banks is not sufficient to prevent crises. This is because it ignores systemic risk. Six types of systemic risk are identified, namely: (i) panics – banking crises due to multiple equilibria; (ii) banking crises due to asset price falls; (iii) contagion; (iv) financial architecture; (v) foreign exchange mismatches in the banking system; (vi) behavioral effects from Knightian uncertainty. We focus on the first three as they are arguably the main causes of the 2007-9 crisis and consider regulatory and other policies to counteract them.

Keywords: financial crises, asset price bubbles, contagion, macroprudential

JEL Classification: G01, G21, G28

Suggested Citation

Allen, Franklin and Gu, Xian, The Interplay between Regulations and Financial Stability (March 9, 2018). Available at SSRN: https://ssrn.com/abstract=3140741 or http://dx.doi.org/10.2139/ssrn.3140741

Franklin Allen (Contact Author)

Imperial College London ( email )

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

Xian Gu

Durham University Business School ( email )

Mill Hill Lane
Durham, DH1 3LB
United Kingdom

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