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The Interplay between Regulations and Financial Stability

Franklin Allen () and Xian Gu ()
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Franklin Allen: Imperial College London
Xian Gu: Central University of Finance and Economics

Journal of Financial Services Research, 2018, vol. 53, issue 2, 233-248

Abstract: Abstract The crisis demonstrated that microprudential regulation focusing on the risks taken by individual banks is not sufficient to prevent crises. This is because it ignores systemic risk. Six types of systemic risk are identified, namely: (i) panics – banking crises due to multiple equilibria; (ii) banking crises due to asset price falls; (iii) contagion; (iv) financial architecture; (v) foreign exchange mismatches in the banking system; (vi) behavioral effects from Knightian uncertainty. We focus on the first three as they are arguably the main causes of the 2007–9 crisis and consider regulatory and other policies to counteract them.

Keywords: Financial crises; Asset price bubbles; Contagion; Macroprudential (search for similar items in EconPapers)
JEL-codes: G01 G21 G28 (search for similar items in EconPapers)
Date: 2018
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