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A Systemic Approach to Financial Regulation: a European Perspective

Michel Aglietta and Laurence Scialom ()

International Economics, 2010, issue 123, 31–65

Abstract: The global financial crisis has pinpointed the relevance and the virulence of systemic risk in modern innovative finance. It is grounded in the propensity of credit markets to drift to extremes in close correlation with asset price spikes and slumps. In turn, such a propensity is nurtured by the heuristic behaviour of market participants under severe uncertainty. While plagued by disaster myopia, market participants spread systemic risk. Such adverse conditions have been magnified by financial innovations that have made finance predatory and capable of capturing regulators to annihilate prudential policies. Malfunctioning in finance is so deep and disorders are so widespread that sweeping reforms are the order of the day, if financial stability is viewed as a primary public concern. In this paper we argue that macro prudential policy should be the linchpin of relevant reforms. Being a top-down approach, it impinges both upon monetary policy and micro prudential policy.

Keywords: Financial crisis; Macro-prudential policy; Financial regulation (search for similar items in EconPapers)
JEL-codes: E58 G01 G28 (search for similar items in EconPapers)
Date: 2010
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