Contextualizing Systemic Risk

Lukas Scheffknecht

No 201317, ROME Working Papers from ROME Network

Abstract: I analyze the rapidly growing literature about systemic risk in financial markets and find an important commonality. Systemic risk is regarded to be an endogenous outcome of interactions by rational agents on imperfect markets. Market imperfections give rise to systemic externalities which cause an excessive level of systemic risk. This creates a scope for welfare-increasing government interventions. Current policy debates usually refer to them as ’macroprudential regulation’. I argue that efforts undertaken in this direction - most notably the incipient implementation of Basel III- are insufficient. The problem of endogenous financial instability and excessive systemic risk remains an unresolved issue which carries unpleasant implications for central bankers. In particular, monetary policy is in danger of persistently getting burdened with the difficult task to simultaneously ensure macroeconomic and financial stability.

Keywords: Systemic Risk; Systemic Externalities; Macroprudential Regulation; Basel III (search for similar items in EconPapers)
JEL-codes: E44 E52 G01 G18 (search for similar items in EconPapers)
Pages: 40 pages
Date: 2013-12
New Economics Papers: this item is included in nep-ban, nep-cba, nep-mac and nep-rmg
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