Regulating Systemic Risk

Masahiro Kawai () and Michael Pomerleano

No 189, ADBI Working Papers from Asian Development Bank Institute

Abstract: The failure to spot emerging systemic risk and prevent the current global financial crisis warrants a reexamination of the approach taken so far to crisis prevention. The paper argues that financial crises can be prevented, as they build up over time due to policy mistakes and eventually erupt in "slow motion." While one cannot predict the precise timing of crises, one can avert them by identifying and dealing with sources of instability. For this purpose, policymakers need to strengthen top-down macroprudential supervision, complemented by bottom-up microprudential supervision. The paper explores such a strategy and the institutional setting required to implement it at the national level. Given that the recent regulatory reforms that have been undertaken to address systemic risks are inadequate to prevent and combat future crises, the paper argues that national measures to promote financial stability are crucial and that the Westphalian principles governing international financial oversight should be rejected. The paper proposes that while an effective national systemic regulator should be established, strong international cooperation is indispensable for financial stability.

Keywords: global financial crisis; systemic risk; macroprudential supervision; systemic stability regulation; regulating systemic risk (search for similar items in EconPapers)
JEL-codes: G01 G21 G28 (search for similar items in EconPapers)
Pages: 23 pages
Date: 2010-01-27
New Economics Papers: this item is included in nep-reg and nep-rmg
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Citations: View citations in EconPapers (3)

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Related works:
Chapter: Regulating Systemic Risk (2011)
Working Paper: Regulating Systemic Risk (2010)
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