Regulating Systemic Risk
AbstractThe failure to spot emerging systemic risk and prevent the current global financial crisis warrants a reexamination of the approach taken so far to crisis prevention. The paper argues that financial crises can be prevented, as they build up over time due to policy mistakes and eventually erupt in slow motion. While one cannot predict the precise timing of crises, one can avert them by identifying and dealing with sources of instability. For this purpose, policymakers need to strengthen top-down macroprudential supervision, complemented by bottom-up microprudential supervision. The paper explores such a strategy and the institutional setting required to implement it at the national level. Given that the recent regulatory reforms that have been undertaken to address systemic risks are inadequate to prevent and combat future crises, the paper argues that national measures to promote financial stability are crucial and that the Westphalian principles governing international financial oversight should be rejected. The paper proposes that while an effective national systemic regulator should be established, strong international cooperation is indispensable for financial stability.
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Bibliographic InfoPaper provided by East Asian Bureau of Economic Research in its series Finance Working Papers with number 23014.
Date of creation: Jan 2010
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systemic risk; global financial crisis; macroprudential supervision; microprudential supervision; regulatory reform;
Other versions of this item:
- Kawai, Masahiro & Pomerleano, Michael, 2010. "Regulating Systemic Risk," ADBI Working Papers, Asian Development Bank Institute 189, Asian Development Bank Institute.
- G01 - Financial Economics - - General - - - Financial Crises
- G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
- G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
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- Jerry H Tempelman, 2009. "Getting Off Track: How Government Actions and Interventions Caused, Prolonged, and Worsened the Financial Crisis," Business Economics, Palgrave Macmillan, Palgrave Macmillan, vol. 44(3), pages 182-183, July.
- Kawai, Masahiro, 2000. "The resolution of the East Asian crisis: financial and corporate sector restructuring," Journal of Asian Economics, Elsevier, Elsevier, vol. 11(2), pages 133-168.
- Martin CihÃ¡k & Richard Podpiera, 2006. "Isone Watchdog Better Than Three? International Experience with Integrated Financial Sector Supervision," IMF Working Papers, International Monetary Fund 06/57, International Monetary Fund.
- Masahiro Kawai & Mariko Fujii, 2010. "Lessons from Japanâ€™s Banking Crisis," Working Papers, eSocialSciences id:2992, eSocialSciences.
- Martin Èihák & Richard Podpiera, 2006. "Is One Watchdog Better than Three? International Experience with Integrated Financial-Sector Supervision (in English)," Czech Journal of Economics and Finance (Finance a uver), Charles University Prague, Faculty of Social Sciences, Charles University Prague, Faculty of Social Sciences, vol. 56(3-4), pages 102-126, March.
- Jeffrey Carmichael & Michael Pomerleano, 2002. "The Development and Regulation of Non-Bank Financial Institutions," World Bank Publications, The World Bank, The World Bank, number 15236, February.
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