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Containing Systemic Risk: Paradigm-Based Perspectives on Regulatory Reform

Author

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  • Augusto de la Torre
  • Alain Ize

Abstract

Financial crises happen when: (i) nobody really understands what is going on (the collective cognition paradigm); (ii) some understand better and take advantage (the asymmetric information paradigm); (iii) everybody understands but crises are a natural part of the financial landscape (the market segmentation paradigm); or (iv) everybody understands yet fail to act because private and social interests do not coincide (the collective action paradigm). The four paradigms have different and often conflicting prudential policy implications. We propose and discuss three sets of reforms that would give due weight to the insights from the collective action and collective cognition paradigms by: (i) redrawing the regulatory perimeter to internalize systemic risk without promoting dynamic regulatory arbitrage; (ii) introducing a truly systemic liquidity regulation that moves away from a purely idiosyncratic focus on maturity mismatches; and (iii) building up the supervisory function while avoiding the pitfalls of expanded official oversight.

Suggested Citation

  • Augusto de la Torre & Alain Ize, 2010. "Containing Systemic Risk: Paradigm-Based Perspectives on Regulatory Reform," Economía Journal, The Latin American and Caribbean Economic Association - LACEA, vol. 0(Fall 2010), pages 25-64.
    • Handle: RePEc:col:000425:008452
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    Cited by:

    1. 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.
    2. Augusto de la Torre & Erik Feyen & Alain Ize, 2013. "Financial Development: Structure and Dynamics," The World Bank Economic Review, World Bank, vol. 27(3), pages 514-541.
    3. Erik Feyen & Thorsten Beck, 2013. "Benchmarking Financial Systems : Introducing the Financial Possibility Frontier," World Bank Publications - Reports 16319, The World Bank Group.
    4. Stijn Claessens & M. Ayhan Kose, 2013. "Financial Crises: Explanations, Types and Implications," CAMA Working Papers 2013-06, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
    5. Kowalski, Tadeusz, 2013. "Globalization and Transformation in Central European Countries: The Case of Poland," MPRA Paper 59306, University Library of Munich, Germany.
    6. Zulal Denaux & Mert Topcu & Furkan Emirmahmutoglu, 2023. "Revisiting the financial development and economic growth nexus: Evidence from south Korea," Economics Bulletin, AccessEcon, vol. 43(3), pages 1328-1337.
    7. Miller, Marcus & Li, Han Hao, 2011. "When bigger isn?t better: Bail outs and bank behaviour," CEPR Discussion Papers 8602, C.E.P.R. Discussion Papers.
    8. Santiago Fernandez de Lis & Alicia Garcia-Herrero, 2013. "Dynamic Provisioning: A Buffer Rather Than a Countercyclical Tool?," Economía Journal, The Latin American and Caribbean Economic Association - LACEA, vol. 0(Spring 20), pages 35-67.
    9. de la Torre, Augusto, 2013. "Comment," LSE Research Online Documents on Economics 123229, London School of Economics and Political Science, LSE Library.
    10. 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.
    11. David VanHoose, 2011. "Systemic Risk and Macroprudential Bank Regulation: A Critical Appraisal," Journal of Financial Transformation, Capco Institute, vol. 33, pages 45-60.
    12. Stephany Griffith-Jones, 2014. "Pour une libéralisation prudente du secteur financier : implications en matière de politique économique," Revue d’économie du développement, De Boeck Université, vol. 22(2), pages 81-112.

    More about this item

    Keywords

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    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation

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