Regulating Systemic Institutions
The subprime crisis has revealed many loopholes in the supervisory/regulatory framework for banks. The most dramatic of these loopholes is certainly the Too Big To Fail (TBTF) problem: As a consequence of the way central banks and Treasuries have managed the crisis, any large financial institution that encounters financial problems in the future can expect to be bailed out by public authorities on the ground that its resolution could provoke a systemic crisis. This article proposes a solution to the TBTF problem, based on an Industrial Organization approach. Instead of simply downsizing large financial institutions or imposing stricter regulations based on newly developed measures of systemic risk exposures, I propose to reform in depth the organization of interbank and money markets.
Volume (Year): 22 (2009)
Issue (Month): 2 (Autumn)
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- Goodhart, Charles & Schoenmaker, Dirk, 1995. "Should the Functions of Monetary Policy and Banking Supervision Be Separated?," Oxford Economic Papers, Oxford University Press, vol. 47(4), pages 539-60, October.
- Jean-Charles Rochet & Jean Tirole, 1996.
"Interbank lending and systemic risk,"
Board of Governors of the Federal Reserve System (U.S.), pages 733-765.
- Donald P. Morgan & Kevin J. Stiroh, 2005. "Too big to fail after all these years," Staff Reports 220, Federal Reserve Bank of New York.
- Frederic S. Mishkin, 2005. "How Big a Problem is Too Big to Fail?," NBER Working Papers 11814, National Bureau of Economic Research, Inc.
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