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Containing systemic risk : paradigm-based perspectives on regulatory reform

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  • de la Torre, Augusto
  • Ize, Alain

Abstract

Financial crises can happen for a variety of reasons: (a) nobody really understands what is going on (the collective cognition paradigm); (b) some understand better than others and take advantage of their knowledge (the asymmetric information paradigm); (c) everybody understands, but crises are a natural part of the financial landscape (the costly enforcement paradigm); or (d) everybody understands, yet no one acts because private and social interests do not coincide (the collective action paradigm). The four paradigms have different and often conflicting prudential policy implications. This paper proposes and discusses three sets of reforms that would give due weight to the insights from the collective action and collective cognition paradigms by redrawing the regulatory perimeter to internalize systemic risk without promoting dynamic regulatory arbitrage; introducing a truly systemic liquidity regulation that moves away from a purely idiosyncratic focus on maturity mismatches; and building up the supervisory function while avoiding the pitfalls of expanded official oversight.

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Bibliographic Info

Paper provided by The World Bank in its series Policy Research Working Paper Series with number 5523.

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Date of creation: 01 Jan 2011
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Handle: RePEc:wbk:wbrwps:5523

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Keywords: Debt Markets; Emerging Markets; Financial Intermediation; Banks&Banking Reform; Labor Policies;

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  1. Bryan R. Routledge, Stanley E. Zin, 2000. "Model Uncertainity And Liquidity," Computing in Economics and Finance 2000 368, Society for Computational Economics.
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Cited by:
  1. repec:cge:warwcg:65 is not listed on IDEAS
  2. Beck, Thorsten & Feyen, Erik, 2013. "Benchmarking financial systems : introducing the financial possibility frontier," Policy Research Working Paper Series 6615, The World Bank.
  3. Anginer, Deniz & de la Torre, Augusto & Ize, Alain, 2011. "Risk absorption by the state: when is it good public policy ?," Policy Research Working Paper Series 5893, The World Bank.
  4. de la Torre, Augusto & Feyen, Erik & Ize, Alain, 2011. "Financial development : structure and dynamics," Policy Research Working Paper Series 5854, The World Bank.
  5. Anginer, Deniz & de la Torre, Augusto & Ize, Alain, 2014. "Risk-bearing by the state: When is it good public policy?," Journal of Financial Stability, Elsevier, vol. 10(C), pages 76-86.

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