Why Prudential Regulation Will Fail to Prevent Financial Crises. A Legal Approach

Marcelo Prates

No 335, Working Papers Series from Central Bank of Brazil, Research Department

Abstract: In this paper, we suggest that the regulation of the financial system, especially if the aim is to prevent financial crises, should be focused on dealing with the consequences of the crises, not on trying to avoid their causes, although it may seem counterintuitive at first sight. Contrary to the majority of opinions in the field, we firmly believe that more important than organizing the best possible prudential regulation is having a solid and well-developed financial safety net. Building a strong safety net might not only boost confidence in the financial system and contribute to its stability, but also create the right incentives to avoid reckless risk-taking, mainly if there are rules establishing that other financial institutions, creditors and even executives could be held responsible for the trouble caused by any failed financial institution.

Date: 2013-11
New Economics Papers: this item is included in nep-cba and nep-rmg
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