Prudential discipline for financial firms: micro, macro, and market structures
AbstractThe recent global financial crisis reflects numerous breakdowns in the prudential discipline of financial firms. This paper discusses ways to strengthen micro- and macroprudential supervision and restore credible market discipline. The discussion notes that microprudential supervisors are typically assigned a variety of goals that sometimes have conflicting policy implications. In such a setting, the structure of the regulatory agencies and the priority given to prudential goals are critical to achieving those goals. ; The analysis of macroprudential supervision emphasizes that this supervisor must be both bold and modest: bold in seeking to understand the sources and distributions of systemically important risks and modest about what a supervisor can do without imposing overly restrictive regulations. ; Finally, the paper argues that the primary responsibility for risk management must rest with firms, not government supervisors. Unfortunately, systemic risk concerns have led governments to shield the private sector from the full losses that dull their incentive to discipline risk taking. This section of the paper suggests that deposit insurance reform, special resolutions for systemically important firms, and requirements that firms plan for their own resolution and contingent capital may all have a role to play in restoring effective market discipline.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by Federal Reserve Bank of Atlanta in its series Working Paper with number 2010-09.
Date of creation: 2010
Date of revision:
Other versions of this item:
- Larry D. Wall, 2010. "Prudential Discipline for Financial Firms: Micro, Macro, and Market Structures," Working Papers id:3040, eSocialSciences.
- Wall, Larry D., 2009. "Prudential Discipline for Financial Firms: Micro, Macro, and Market Structures," ADBI Working Papers 176, Asian Development Bank Institute.
- E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
- G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
- K23 - Law and Economics - - Regulation and Business Law - - - Regulated Industries and Administrative Law
This paper has been announced in the following NEP Reports:
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.:
- Larry Wall & Robert Eisenbeis, 1999.
"Financial Regulatory Structure and the Resolution of Conflicting Goals,"
Journal of Financial Services Research,
Springer, vol. 16(2), pages 223-245, December.
- Robert Eisenbeis & Larry Wall, 1998. "Financial regulatory structure and the resolution of conflicting goals," Proceedings, Federal Reserve Bank of San Francisco, issue Sep.
- Larry D. Wall & Robert A. Eisenbeis, 1999. "Financial regulatory structure and the resolution of conflicting goals," Working Paper 99-12, Federal Reserve Bank of Atlanta.
- Kenneth Lehn, 1999. "Comments on “Financial Regulatory Structure and the Resolution of Conflicting Goals”," Journal of Financial Services Research, Springer, vol. 16(2), pages 247-248, December.
- Adam Ashcraft & Morten L. Bech & W. Scott Frame, 2009.
"The Federal Home Loan Bank System: the lender of next-to-last resort?,"
2009-04, Federal Reserve Bank of Atlanta.
- Adam Ashcraft & Morten L. Bech & W. Scott Frame, 2010. "The Federal Home Loan Bank System: The Lender of Next-to-Last Resort?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 42(4), pages 551-583, 06.
- Adam B. Ashcraft & Morten L. Bech & W. Scott Frame, 2008. "The Federal Home Loan Bank System: the lender of next-to-last resort?," Staff Reports 357, Federal Reserve Bank of New York.
- David G. Mayes & María J. Nieto & Larry Wall, 2008.
"Multiple safety net regulators and agency problems in the EU: Is Prompt Corrective Action partly the solution?,"
Banco de Espaï¿½a Working Papers
0819, Banco de Espa�a.
- Mayes, David G. & Nieto, María J. & Wall, Larry, 2008. "Multiple safety net regulators and agency problems in the EU: Is Prompt Corrective Action partly the solution?," Journal of Financial Stability, Elsevier, vol. 4(3), pages 232-257, September.
- Gillian G.H. Garcia & Rosa M. Lastra & María J. Nieto, 2009. "Bankruptcy and reorganization procedures for cross-border banks in the EU: Towards an integrated approach to the reform of the EU safety net," Journal of Financial Regulation and Compliance, Emerald Group Publishing, vol. 17(3), pages 240-276, July.
- Hart, Oliver & Zingales, Luigi, 2009.
"A New Capital Regulation For Large Financial Institutions,"
CEPR Discussion Papers
7298, C.E.P.R. Discussion Papers.
- Luigi Zingales, 2011. "A New Capital Regulation for Large Financial Institutions," American Law and Economics Review, Oxford University Press, vol. 13(2), pages 453-490.
- Luigi Zingales & Oliver Hart, 2009. "A New Capital Regulation For Large Financial Institutions," Working Papers 2009.124, Fondazione Eni Enrico Mattei.
- Kristopher S. Gerardi & Andreas Lehnert & Shane M. Sherlund & Paul S. Willen, 2009.
"Making sense of the subprime crisis,"
Public Policy Discussion Paper
09-1, Federal Reserve Bank of Boston.
- Larry D. Wall, 1986. "Nonbank activities and risk," Economic Review, Federal Reserve Bank of Atlanta, issue Oct, pages 19-34.
- Gillian G.H. Garcia, 2009. "Ignoring the lessons for effective prudential supervision, failed bank resolution and depositor protection," Journal of Financial Regulation and Compliance, Emerald Group Publishing, vol. 17(3), pages 186-209, July.
- Kane, Edward J, 1977. "Good Intentions and Unintended Evil: The Case against Selective Credit Allocation," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 9(1), pages 55-69, February.
- Raghuram G. Rajan, 2009. "The credit crisis and cycle-proof regulation," Review, Federal Reserve Bank of St. Louis, issue Sep, pages 397-402.
- David G. Mayes, 2009. "Banking Crisis Resolution Policy - Lessons from Recent Experience - which elements are needed for robust and efficient crisis resolution?," CESifo Working Paper Series 2823, CESifo Group Munich.
- Reza Siregar & Lim, C.S. Vincent, 2011.
"Living with Macro-financial Linkages: Policy Perspectives and Challenges for SEACEN Countries,"
South East Asian Central Banks (SEACEN) Research and Training Centre, number sp79, June.
- Siregar, Reza & Lim, Vincent C.S., 2011. "Living with Macro-financial Linkages: Policy Perspectives and Challenges for SEACEN Countries," MPRA Paper 28417, University Library of Munich, Germany.
- Coffinet, J. & Pop, A. & Tiesset, M., 2010.
"Predicting Financial Distress in a High-Stress Financial World: The Role of Option Prices as Bank Risk Metrics,"
311, Banque de France.
- Jérôme Coffinet & Adrian Pop & Muriel Tiesset, 2010. "Predicting Financial Distress in a High-Stress Financial World: The Role of Option Prices as Bank Risk Metrics," Working Papers hal-00547744, HAL.
- Wall, Larry D., 2012. "Central Banking for Financial Stability: Some Lessons from the Recent Instability in the United States and Euro Area," ADBI Working Papers 379, Asian Development Bank Institute.
- Larry D. Wall, 2012. "Central banking for financial stability Some lessons from the recent instability in the US and euro area," Public Policy Review, Policy Research Institute, Ministry of Finance Japan, vol. 8(3), pages 247-280, August.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Diane Rosenberger).
If references are entirely missing, you can add them using this form.