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Containing Systemic Risk: Paradigm-Based Perspectives on Regulatory Reform

  • Augusto de la Torre

    ()

  • Alain Ize

    ()

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.

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Article provided by ECONOMIA JOURNAL OF THE LATIN AMERICAN AND CARIBBEAN ECONOMIC ASSOCIATION in its journal ECONOMIA JOURNAL OF THE LATIN AMERICAN AND CARIBBEAN ECONOMIC ASSOCIATION.

Volume (Year): Volume 11 Number 1 (2010)
Issue (Month): Fall 2010 (August)
Pages: 25-64

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Handle: RePEc:col:000425:008452
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  10. Emmanuel Farhi & Jean Tirole, 2011. "Bubbly Liquidity," NBER Working Papers 16750, National Bureau of Economic Research, Inc.
  11. de la Torre, Augusto & Ize, Alain, 2009. "Regulatory reform : integrating paradigms," Policy Research Working Paper Series 4842, The World Bank.
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  13. Guido Lorenzoni, 2007. "Inefficient Credit Booms," NBER Working Papers 13639, National Bureau of Economic Research, Inc.
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