Financial crisis. Implementation of macro- and micro-prudential regulation
The financial crisis occurs as a result of a disorder in the financial market. It implies serious problems of unfavorable selection and moral risk, making the financial markets unable to direct efficiently the funding from depositors toward individuals and businesses with potential of productive investments. When the financial markets are not able to function efficiently the economic activity visibly decreases. If the crises repeat periodically, it is a challenge of policy makers to review and take regulatory measures. They should not just watch the situation, but also react according to the character and the color of the actual crisis. Exchange of thoughts in recent times go through criticism of existing implemented models (almost unpredictable and accompanied with enormous costs to the population) to stabilization policies that hurt the expected profit margins and the control of pressures over prices. The reason we try to prevent financial crises is that the social costs are invariably high and exceed the private cost to private financial institutions. We regulate to internalize these externalities in the behavior of the financial institutions. One of the most important regulatory tools used is the request for capital adequacy.... As a conclusion, in order to prevent these crises, well defined micro- and macro-prudential need to be established. They also help on monetary policies.
Volume (Year): 5 (2013)
Issue (Month): 1 (June)
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- Allen, William A. & Wood, Geoffrey, 2006.
"Defining and achieving financial stability,"
Journal of Financial Stability,
Elsevier, vol. 2(2), pages 152-172, June.
- William A. Allen & Geoffrey Wood, 2005. "Defining and Achieving Financial Stability," FMG Special Papers sp160, Financial Markets Group.
- Benati, Luca & Mumtaz, Haroon, 2007. "U.S. evolving macroeconomic dynamics: a structural investigation," Working Paper Series 0746, European Central Bank. Full references (including those not matched with items on IDEAS)
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