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Taming Systemically Important Financial Institutions

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  • XAVIER FREIXAS
  • JEAN‐CHARLES ROCHET

Abstract

We model a systemically important financial institution that is too big (or too interconnected) to fail. Without credible regulation and strong supervision, the shareholders of this institution might deliberately let its managers take excessive risk. We propose a solution to this problem, showing how insurance against systemic shocks can be provided without generating moral hazard. The solution involves levying a systemic tax needed to cover the costs of future crises and more importantly establishing a systemic risk authority endowed with special resolution powers, including the control of bankers’ compensation packages during crisis periods.

Suggested Citation

  • Xavier Freixas & Jean‐Charles Rochet, 2013. "Taming Systemically Important Financial Institutions," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 45(s1), pages 37-58, August.
  • Handle: RePEc:wly:jmoncb:v:45:y:2013:i:s1:p:37-58
    DOI: 10.1111/jmcb.12036
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    References listed on IDEAS

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    1. Smaoui, Houcem & Mimouni, Karim & Miniaoui, Héla & Temimi, Akram, 2020. "Funding liquidity risk and banks' risk-taking: Evidence from Islamic and conventional banks," Pacific-Basin Finance Journal, Elsevier, vol. 64(C).
    2. Mohamed Belhaj & Renaud Bourlès & Frédéric Deroïan, 2020. "Prudential Regulation in Financial Networks," Working Papers halshs-02950881, HAL.
    3. Srivastav, Abhishek & Armitage, Seth & Hagendorff, Jens & King, Tim, 2018. "Better safe than sorry? CEO inside debt and risk-taking in bank acquisitions," Journal of Financial Stability, Elsevier, vol. 36(C), pages 208-224.
    4. Yang, Hsin-Feng & Liu, Chih-Liang & Yeutien Chou, Ray, 2020. "Bank diversification and systemic risk," The Quarterly Review of Economics and Finance, Elsevier, vol. 77(C), pages 311-326.
    5. Hendrik Hakenes & Isabel Schnabel, 2014. "Bank Bonuses and Bailouts," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 46(s1), pages 259-288, February.
    6. Björn Imbierowicz & Jonas Kragh & Jesper Rangvid, 2018. "Time‐Varying Capital Requirements and Disclosure Rules: Effects on Capitalization and Lending Decisions," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 50(4), pages 573-602, June.
    7. Thanassoulis, John & Tanaka, Misa, 2015. "Bankers' pay and excessive risk," Bank of England working papers 558, Bank of England.
    8. Natalia Tente & Natalja Von Westernhagen & Ulf Slopek, 2019. "M‐PRESS‐CreditRisk: Microprudential and Macroprudential Capital Requirements for Credit Risk under Systemic Stress," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 51(7), pages 1923-1961, October.

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