AbstractWe 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.
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Bibliographic InfoPaper provided by Barcelona Graduate School of Economics in its series Working Papers with number 649.
Date of creation: Jun 2012
Date of revision:
SIFI; dynamic moral hazard; risk taking;
Other versions of this item:
- Xavier Freixas & Jean-Charles Rochet, 2012. "Taming SIFIs," Economics Working Papers, Department of Economics and Business, Universitat Pompeu Fabra 1328, Department of Economics and Business, Universitat Pompeu Fabra.
- G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
- G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
- G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
This paper has been announced in the following NEP Reports:
- NEP-ALL-2012-07-23 (All new papers)
- NEP-BAN-2012-07-23 (Banking)
- NEP-CBA-2012-07-23 (Central Banking)
- NEP-CTA-2012-07-23 (Contract Theory & Applications)
- NEP-RMG-2012-07-23 (Risk Management)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Bruno Biais & Thomas Mariotti & Jean-Charles Rochet & StÈphane Villeneuve, 2010.
"Large Risks, Limited Liability, and Dynamic Moral Hazard,"
Econometrica, Econometric Society,
Econometric Society, vol. 78(1), pages 73-118, 01.
- Biais, Bruno & Mariotti, Thomas & Rochet, Jean-Charles & Villeneuve, Stéphane, 2007. "Large Risks, Limited Liability and Dynamic Moral Hazard," IDEI Working Papers, Institut d'Ãconomie Industrielle (IDEI), Toulouse 472, Institut d'Économie Industrielle (IDEI), Toulouse, revised Sep 2009.
- Bruno Biais & Thomas Mariotti & Guillaume Plantin & Jean-Charles Rochet, 2007.
"Dynamic Security Design: Convergence to Continuous Time and Asset Pricing Implications,"
Review of Economic Studies,
Oxford University Press, vol. 74(2), pages 345-390.
- Biais, Bruno & Mariotti, Thomas & Plantin, Guillaume & Rochet, Jean-Charles, 2004. "Dynamic Security Design: Convergence to Continuous Time and Asset Pricing Implications," IDEI Working Papers, Institut d'Ãconomie Industrielle (IDEI), Toulouse 312, Institut d'Économie Industrielle (IDEI), Toulouse, revised Sep 2006.
- Guillaume Plantin & Bruno Biais & Thomas Mariotti & Jean-Charles Rochet, 2004.
"Dynamic Security Design,"
GSIA Working Papers, Carnegie Mellon University, Tepper School of Business
2005-E5, Carnegie Mellon University, Tepper School of Business.
- Biais, Bruno & Mariotti, Thomas & Plantin, Guillaume & Rochet, Jean Charles, 2004. "Dynamic Security Design," CEPR Discussion Papers, C.E.P.R. Discussion Papers 4753, C.E.P.R. Discussion Papers.
- John, Kose & Mehran, Hamid & Qian, Yiming, 2010. "Outside monitoring and CEO compensation in the banking industry," Journal of Corporate Finance, Elsevier, Elsevier, vol. 16(4), pages 383-399, September.
- Ing-Haw Cheng & Harrison Hong & Jose Scheinkman, 2010.
"Yesterday’s Heroes: Compensation and Creative Risk-Taking,"
NBER Chapters, National Bureau of Economic Research, Inc,
in: Market Institutions and Financial Market Risk
National Bureau of Economic Research, Inc.
- Ing-Haw Cheng & Harrison Hong & Jose A. Scheinkman, 2010. "Yesterday's Heroes: Compensation and Creative Risk-Taking," NBER Working Papers 16176, National Bureau of Economic Research, Inc.
- repec:bla:restud:v:74:y:2007:i:2:p:345-390 is not listed on IDEAS
- Völz, Manja & Wedow, Michael, 2009. "Does banks size distort market prices? Evidence for too-big-to-fail in the CDS market," Discussion Paper Series 2: Banking and Financial Studies, Deutsche Bundesbank, Research Centre 2009,06, Deutsche Bundesbank, Research Centre.
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