Taming SIFIs

Xavier Freixas () and Jean Rochet

Economics Working Papers from Department of Economics and Business, Universitat Pompeu Fabra

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: SIFI; dynamic moral hazard; risk taking (search for similar items in EconPapers)
JEL-codes: G21 G32 G34 (search for similar items in EconPapers)
Date: 2012-06
New Economics Papers: this item is included in nep-ban, nep-cta, nep-mic and nep-rmg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Related works:
Working Paper: Taming SIFIs (2015)
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Persistent link: https://EconPapers.repec.org/RePEc:upf:upfgen:1328

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