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Regulating Systemic Institutions

Jean Rochet ()

Finnish Economic Papers, 2009, vol. 22, issue 2, 35-46

Abstract: The subprime crisis has revealed many loopholes in the supervisory/regulatory framework for banks. The most dramatic of these loopholes is certainly the Too Big To Fail (TBTF) problem: As a consequence of the way central banks and Treasuries have managed the crisis, any large financial institution that encounters financial problems in the future can expect to be bailed out by public authorities on the ground that its resolution could provoke a systemic crisis. This article proposes a solution to the TBTF problem, based on an Industrial Organization approach. Instead of simply downsizing large financial institutions or imposing stricter regulations based on newly developed measures of systemic risk exposures, I propose to reform in depth the organization of interbank and money markets.

JEL-codes: G21 L51 (search for similar items in EconPapers)
Date: 2009
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Handle: RePEc:fep:journl:v:22:y:2009:i:2:p:35-46