Systemic Risk and Regulation

Wharton Financial Institutions Center Working Paper No. 95-24

35 Pages Posted: 30 Aug 2005

See all articles by Franklin Allen

Franklin Allen

Imperial College London

Douglas M. Gale

New York University (NYU) - Department of Economics

Date Written: 2005

Abstract

Historically, much of the banking regulation that was put in place was designed to reduce systemic risk. In many countries capital regulation in the form of the Basel agreements is currently one of the most important measures to reduce systemic risk. In recent years there has been considerable growth in the transfer of credit risk across and between sectors of the financial system. In particular there is evidence that risk has been transfered from the banking sector to the insurance sector. One argument is that this is desirable and simply reflects diversification opportunities. Another is that it represents regulatory arbitrage and the concentration of risk that may result from this could increase systemic risk. This paper shows that both scenarios are possible depending on whether markets and contracts are complete or incomplete.

Suggested Citation

Allen, Franklin and Gale, Douglas M., Systemic Risk and Regulation (2005). Wharton Financial Institutions Center Working Paper No. 95-24. Available at SSRN: https://ssrn.com/abstract=787797 or http://dx.doi.org/10.2139/ssrn.787797

Franklin Allen (Contact Author)

Imperial College London ( email )

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

Douglas M. Gale

New York University (NYU) - Department of Economics ( email )

269 Mercer Street, 7th Floor
New York, NY 10011
United States
(212) 998-8944 (Phone)
(212) 995-3932 (Fax)

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