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A Systemic Approach to Financial Regulation: a European Perspective

  • Michel Aglietta
  • Laurence Scialom

The global financial crisis has pinpointed the relevance and the virulence of systemic risk in modern innovative finance. It is grounded in the propensity of credit markets to drift to extremes in close correlation with asset price spikes and slumps. In turn, such a propensity is nurtured by the heuristic behaviour of market participants under severe uncertainty. While plagued by disaster myopia, market participants spread systemic risk. Such adverse conditions have been magnified by financial innovations that have made finance predatory and capable of capturing regulators to annihilate prudential policies. Malfunctioning in finance is so deep and disorders are so widespread that sweeping reforms are the order of the day, if financial stability is viewed as a primary public concern. In this paper we argue that macro prudential policy should be the linchpin of relevant reforms. Being a top-down approach, it impinges both upon monetary policy and micro prudential policy.

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Article provided by CEPII research center in its journal International Economics/Economie Internationale.

Volume (Year): (2010)
Issue (Month): 123 ()
Pages: 31-66

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Handle: RePEc:cii:cepiei:2010-3tc
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  1. Tobias Adrian & Hyun Song Shin, 2008. "Liquidity, monetary policy, and financial cycles," Current Issues in Economics and Finance, Federal Reserve Bank of New York, vol. 14(Jan).
  2. Dewatripont, M. & Rochet, JC., 2009. "The treatment of distressed banks," Financial Stability Review, Banque de France, issue 13, pages 65-74, September.
  3. Charles A.E. Goodhart & Pojanart Sunirand & Dimitrios P. Tsomocos, 2005. "A risk assessment model for banks," Annals of Finance, Springer, vol. 1(2), pages 197-224, 09.
  4. Robert A. Eisenbeis & George G. Kaufman, 2007. "Cross-border banking: challenges for deposit insurance and financial stability in the European Union," FRB Atlanta Working Paper No. 2006-15, Federal Reserve Bank of Atlanta.
  5. Martin Hellwig, 2009. "Systemic Risk in the Financial Sector: An Analysis of the Subprime-Mortgage Financial Crisis," De Economist, Springer, vol. 157(2), pages 129-207, June.
  6. Robert A. Eisenbeis & George G. Kaufman, 2005. "Bank crisis resolution and foreign-owned banks," Economic Review, Federal Reserve Bank of Atlanta, issue Q4, pages 1-18.
  7. Con Keating & Hyun Song Shin & Charles Goodhart & Jon Danielsson, 2001. "An Academic Response to Basel II," FMG Special Papers sp130, Financial Markets Group.
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