Market Failures and Regulatory Failures: Lessons from Past and Present Financial Crises

Viral Acharya, Thomas Cooley, Matthew Richardson and Ingo Walter
Additional contact information
Matthew Richardson: Asian Development Bank Institute
Ingo Walter: Asian Development Bank Institute

No 264, ADBI Working Papers from Asian Development Bank Institute

Abstract: The paper analyzes the financial crisis of 2007–2009 through the lens of market failures and regulatory failures and presents a case that there were four primary failures contributing to the crisis: excessive risk-taking in the financial sector due to mispriced government guarantees; regulatory focus on individual institution risk rather than systemic risk; opacity of positions in financial derivatives that produced externalities from individual firm failures; and runs on the unregulated banking sector that eventually threatened to bring down the entire financial sector. In emphasizing the role of regulatory failures, the paper provides a description of regulatory evolution in response to the panic of 1907 and the Great Depression, why the regulation put in place then was successful in addressing market failures, but how, over time, especially around the resolutions of Continental Illinois, Savings and Loans crisis and the Long-Term Capital Management, expectations of too-big-to-fail status got anchored. The paper proposes specific reforms to address the four market and regulatory failures we identify, and we conclude with some lessons for emerging markets.

Keywords: global financial crisis; LTCM; market failures; regulation; emerging markets (search for similar items in EconPapers)
JEL-codes: E44 G01 G15 G18 G21 G24 (search for similar items in EconPapers)
Pages: 41 pages
Date: 2011-02-08
New Economics Papers: this item is included in nep-cis, nep-his, nep-mac, nep-reg and nep-sea
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (18)

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Related works:
Working Paper: Market Failures and Regulatory Failures: Lessons from Past and Present Financial Crises (2011)
Working Paper: Market Failures and Regulatory Failures: Lessons from Past and Present Financial Crises (2011)
Working Paper: Market Failures and Regulatory Failures: Lessons from Past and Present Financial Crises (2011)
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