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The Interplay between Regulations and Financial Stability

Franklin Allen and Xian Gu

No 12862, CEPR Discussion Papers from C.E.P.R. Discussion Papers

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: Asset price bubbles; contagion; Financial crises; macroprudential (search for similar items in EconPapers)
JEL-codes: G01 G21 G28 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ban, nep-cba and nep-rmg
Date: 2018-04
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