Taming SIFIs

Jean Rochet and Xavier Freixas ()

No 649, Working Papers from Barcelona School of Economics

Abstract: We model a Systemically Important Financial Institution (SIFI) that is too big (or too interconnected) to fail. Without credible regulation and strong supervision, the shareholders of this institution might deliberately let its managers take excessive risk. We propose a solution to this problem, showing how insurance against systemic shocks can be provided without generating moral hazard. The solution involves levying a systemic tax needed to cover the costs of future crises and more importantly establishing a Systemic Risk Authority endowed with special resolution powers, including the control of bankers' compensation packages during crisis periods.

Keywords: risk taking; SIFI; dynamic moral hazard (search for similar items in EconPapers)
JEL-codes: G21 G32 G34 (search for similar items in EconPapers)
Date: 2015-09
New Economics Papers: this item is included in nep-ban, nep-cba, nep-cta and nep-rmg
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Citations: View citations in EconPapers (1)

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Working Paper: Taming SIFIs (2012)
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Persistent link: https://EconPapers.repec.org/RePEc:bge:wpaper:649

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