Containing Systemic Risk : Paradigm-Based Perspectives on Regulatory Reform

Financial crises can happen for a variety of reasons: (a) nobody really understands what is going on (the collective cognition paradigm); (b) some understand better than others and take advantage of their knowledge (the asymmetric information parad...

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Bibliographic Details
Main Authors:	de la Torre, Augusto, Ize, Alain
Format:	Policy Research Working Paper
Language:	English
Published:	2012
Subjects:	ACCOUNTING ADVERSE SELECTION AGENCY PROBLEMS ARBITRAGE ASSET MANAGERS ASSET PRICES ASSET PRICING ASYMMETRIC INFORMATION BAILOUTS BALANCE SHEET BALANCE SHEETS BANK CAPITAL BANK OF ENGLAND BANK RUNS BANKING CRISES BANKING CRISIS BANKING SYSTEM BARGAINING BORROWER BORROWING BUSINESS CYCLE BUSINESS OPPORTUNITIES CAPITAL CONSTRAINTS CAPITAL FLOWS CAPITAL MARKET CAPITAL MARKETS CAPITAL REGULATION CAPITAL REQUIREMENTS CENTRAL BANK CLOSED ECONOMY COLLATERAL COLLECTIVE ACTION COMMERCIAL BANKING COMMERCIAL BANKS CONFLICT OF INTEREST CONTAINING SYSTEMIC RISK CONTRACT ENFORCEMENT CONTRACT RIGHTS COORDINATION FAILURE COORDINATION FAILURES CREDIT EXPANSIONS CREDIT RISK CREDIT RISK EXPOSURES DEBT DEBT CONTRACTS DEBT ISSUES DEEDS DEFAULT RISK DEPOSIT DEPOSIT INSURANCE DEPOSITORS DEPOSITS DEREGULATION DISPLACEMENT DOUBLE TAXATION DOWNSIDE RISKS DRIVERS ECONOMIC GROWTH EMERGING MARKETS EMPLOYMENT ENTRY REQUIREMENTS EUROPEAN CENTRAL BANK EXPOSURE EXPOSURE TO RISKS EXTERNALITIES FAILURE RESOLUTION FEDERAL RESERVE FEDERAL RESERVE BANK FEDERAL RESERVE BANK OF NEW YORK FINANCIAL CONTRACTS FINANCIAL CRISES FINANCIAL CRISIS FINANCIAL DEVELOPMENT FINANCIAL FRAGILITY FINANCIAL INNOVATION FINANCIAL INNOVATIONS FINANCIAL INSTITUTIONS FINANCIAL INTERMEDIARIES FINANCIAL INTERMEDIARY FINANCIAL INTERMEDIATION FINANCIAL MARKETS FINANCIAL POLICIES FINANCIAL PRODUCTS FINANCIAL REFORM FINANCIAL REGULATION FINANCIAL SERVICES FINANCIAL STABILITY FINANCIAL STRUCTURE FINANCIAL STUDIES FINANCIAL SYSTEM FINANCIAL SYSTEMS FINANCIAL TRANSACTIONS FISCAL POLICY FRAUD GLOBAL BANKING HOLDING HOLDINGS HOUSING ILLIQUID ASSETS IMPERFECT INFORMATION INCOMPLETE MARKETS INFORMATION ASYMMETRIES INFORMATION ASYMMETRY INFORMED INVESTORS INSURANCE PREMIUM INTEREST RATES INTERNATIONAL BANK INTERNATIONAL ECONOMICS INTERNATIONAL FINANCE INTERNATIONAL FINANCIAL CRISIS INVESTING INVESTMENT BANKS INVESTMENT DECISIONS INVESTMENT OPPORTUNITIES INVESTOR PROTECTION IRRATIONAL EXUBERANCE LENDER LENDER OF LAST RESORT LENDER-OF-LAST-RESORT LENDERS LEVEL PLAYING FIELD LIABILITY LIQUID INVESTMENTS LIQUID MARKETS LIQUIDITY LIQUIDITY RISK LOAN MACROECONOMIC CONDITIONS MARKET ACCESS MARKET DISCIPLINE MARKET EQUILIBRIUM MARKET FAILURE MARKET FAILURES MARKET INEFFICIENCIES MARKET LIQUIDITY MARKET MICROSTRUCTURE MARKET PARTICIPANTS MARKET PLAYERS MARKET PRICES MARKET SEGMENTATION MARKET SPECIALISTS MATURITY MATURITY MISMATCH MATURITY MISMATCHES MONETARY FUND MONETARY POLICY MORAL HAZARD OPEN ECONOMY PARTICIPATIONS PECUNIARY EXTERNALITIES POLITICAL ECONOMY PORTFOLIOS PRIVATE CAPITAL PROVISIONING RULES PRUDENTIAL REGULATION PRUDENTIAL REGULATIONS PUBLIC DEBT PUBLIC INVESTMENT PUBLIC POLICY RAPID GROWTH REAL ESTATE REGULATOR REGULATORS REGULATORY APPROACHES REGULATORY CONSTRAINTS REGULATORY FRAMEWORK REGULATORY REGIMES REGULATORY SYSTEM REGULATORY TREATMENT RELATIONSHIP LENDING REPAYMENT REPUTATION RETURN RETURNS RISK ASSESSMENTS RISK AVERSION RISK MANAGEMENT RISK NEUTRAL RISK SHARING RISK TAKING RISK WEIGHTS SAFETY SAFETY NET SAVINGS SECONDARY MARKETS SECURITIES SECURITIES MARKET SECURITIES MARKET REGULATIONS SECURITIZATION SOCIAL BENEFITS SOCIAL COSTS SOCIAL RISKS SUPERVISORY AGENCY SYSTEMIC INSTABILITY SYSTEMIC RISK SYSTEMIC RISKS TAX TAX RATE TAX SYSTEM TRADITIONAL BANKING TRANSACTION TRANSACTION COSTS TRANSPARENCY VOLATILITY WHOLESALE FINANCE WHOLESALE FUNDING WHOLESALE INVESTORS WORLD ECONOMY
Online Access:	http://www-wds.worldbank.org/external/default/main?menuPK=64187510&pagePK=64193027&piPK=64187937&theSitePK=523679&menuPK=64187510&searchMenuPK=64187283&siteName=WDS&entityID=000158349_20110105150802 http://hdl.handle.net/10986/3296

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Summary:	Financial crises can happen for a variety of reasons: (a) nobody really understands what is going on (the collective cognition paradigm); (b) some understand better than others and take advantage of their knowledge (the asymmetric information paradigm); (c) everybody understands, but crises are a natural part of the financial landscape (the costly enforcement paradigm); or (d) everybody understands, yet no one acts because private and social interests do not coincide (the collective action paradigm). The four paradigms have different and often conflicting prudential policy implications. This paper proposes and discusses three sets of reforms that would give due weight to the insights from the collective action and collective cognition paradigms by redrawing the regulatory perimeter to internalize systemic risk without promoting dynamic regulatory arbitrage; introducing a truly systemic liquidity regulation that moves away from a purely idiosyncratic focus on maturity mismatches; and building up the supervisory function while avoiding the pitfalls of expanded official oversight.

Containing Systemic Risk : Paradigm-Based Perspectives on Regulatory Reform

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