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Connect them where it hurts. The missing piece of the puzzle

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  • Lorenzo Esposito

    ()
    (Banca d'Italia)

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    Abstract

    The crisis has shown that banks that are too big to fail are at the core of the international financial system. These institutions are thus at the centre of a powerful wave of re-regulation of the banking system. Overall, the proposals developed to strengthen the capacity of big banks to weather future crises, starting with Basel 3, point in the right direction, but they are missing an essential element. SIFIs have a peculiar nature. Their most salient feature is that because of their size, interconnectedness and similar strategies, a crisis of one tends to become a crisis of all. Hence, it is essential to have a mechanism in place to link them together beforehand. The paper analyzes measures that can serve this end. It then proposes a tool designed to give SIFIs a shared interest in behaving correctly, i.e. taking into account the externality implied by their very existence.

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    File URL: http://www.bancaditalia.it/pubblicazioni/econo/quest_ecofin_2/qef151/QEF_151.pdf
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    Bibliographic Info

    Paper provided by Bank of Italy, Economic Research and International Relations Area in its series Questioni di Economia e Finanza (Occasional Papers) with number 151.

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    Date of creation: Feb 2013
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    Handle: RePEc:bdi:opques:qef_151_13

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    Related research

    Keywords: financial crisis; too big to fail; macro-prudential; stability fund;

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    1. Larry Eisenberg & Thomas H. Noe, 2001. "Systemic Risk in Financial Systems," Management Science, INFORMS, vol. 47(2), pages 236-249, February.
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