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Change and Constancy in the Financial System: Implications for Financial Distress and Policy

In: The Structure and Resilience of the Financial System


  • Claudio Borio

    (Bank for International Settlements)


Over the past three decades, the financial system has been going through a historical phase of major structural change. This paper traces the implications of this financial revolution for the dynamics of financial distress and for policy. It argues that, despite this revolution, some fundamental characteristics of the financial system have not changed and that these hold the key to the dynamics of financial instability. These characteristics relate to imperfect information in financial contracts, to risk perceptions and incentives, and to powerful feedback mechanisms operating both within the financial system and between that system and the macro-economy. As a result, the primary cause of financial instability has always been, and will continue to be, overextension in risk-taking and balance-sheets. The challenge is to design a policy response that is firmly anchored to the more enduring features of financial instability while at the same time tailoring it to the evolving financial system. Using an analogy with road safety, policy has so far largely focused quite effectively on improving the state of the roads and on introducing buffers. More attention, however, could usefully be devoted to the design and implementation of speed limit.
(This abstract was borrowed from another version of this item.)

Suggested Citation

  • Claudio Borio, 2007. "Change and Constancy in the Financial System: Implications for Financial Distress and Policy," RBA Annual Conference Volume,in: Christopher Kent & Jeremy Lawson (ed.), The Structure and Resilience of the Financial System Reserve Bank of Australia.
  • Handle: RePEc:rba:rbaacv:acv2007-02

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    References listed on IDEAS

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    9. Patrick McGuire & Eli Remolona & Kostas Tsatsaronis, 2005. "Time-varying exposures and leverage in hedge funds," BIS Quarterly Review, Bank for International Settlements, March.
    10. Claudio Borio & Ilhyock Shim, 2007. "What can (macro-)prudential policy do to support monetary policy?," BIS Working Papers 242, Bank for International Settlements.
    11. Tobias Adrian & Hyun Song Shin, 2008. "Liquidity and financial cycles," BIS Working Papers 256, Bank for International Settlements.
    12. Claudio Borio, 2003. "Towards a Macroprudential Framework for Financial Supervision and Regulation?," CESifo Economic Studies, CESifo, vol. 49(2), pages 181-215.
    13. Peltzman, Sam, 1975. "The Effects of Automobile Safety Regulation," Journal of Political Economy, University of Chicago Press, vol. 83(4), pages 677-725, August.
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    Cited by:

    1. Király, Júlia & Nagy, Márton & Szabó E., Viktor, 2008. "Egy különleges eseménysorozat elemzése - a másodrendű jelzáloghitel-piaci válság és (hazai) következményei
      [Analysis of a special sequence of events - the crisis on the secondary mortgage market an
      ," Közgazdasági Szemle (Economic Review - monthly of the Hungarian Academy of Sciences), Közgazdasági Szemle Alapítvány (Economic Review Foundation), vol. 0(7), pages 573-621.
    2. Dreger, Christian & Wolters, Jürgen, 2016. "On the Empirical Relevance of the Lucas Critique: the Case of Euro Area Money Demand," EconStor Open Access Articles, ZBW - German National Library of Economics, pages 61-82.
    3. Derek Anderson & Benjamin L Hunt & Stephen Snudden, 2013. "Fiscal Consolidation in the Euro Area; How Much Can Structural Reforms Ease the Pain?," IMF Working Papers 13/211, International Monetary Fund.
    4. Schich, Sebastian T., 2009. "Challenges Associated with the Expansion of Deposit Insurance Coverage during Fall 2008," Economics Discussion Papers 2009-16, Kiel Institute for the World Economy (IfW).
    5. Kent, Christopher John, 2011. "Two depressions, one banking collapse: Lessons from Australia," Journal of Financial Stability, Elsevier, vol. 7(3), pages 126-137, August.
    6. Borio, Claudio & Zhu, Haibin, 2012. "Capital regulation, risk-taking and monetary policy: A missing link in the transmission mechanism?," Journal of Financial Stability, Elsevier, vol. 8(4), pages 236-251.
    7. Claudio Borio, 2008. "The financial turmoil of 2007-?: a preliminary assessment and some policy considerations," BIS Working Papers 251, Bank for International Settlements.
    8. Mario Tonveronachi & Elisabetta Montanaro, 2009. "Some preliminary proposals for re-regulating financial systems," Department of Economics University of Siena 553, Department of Economics, University of Siena.
    9. Mario Tonveronachi, 2016. "A Critical Assessment Of The Eu Monetary, Fiscal And Financial Regulatory Framework And A Reform Proposal," Working papers wpaper132, Financialisation, Economy, Society & Sustainable Development (FESSUD) Project.
    10. Carlos Gustavo Cano, 2008. "Regulación y supervisión: La otra cara de la política monetaria," BORRADORES DE ECONOMIA 004587, BANCO DE LA REPÚBLICA.
    11. Bank Indonesia, 2007. "Financial Deepening to Support Monetary Stability and Sustainable Economic Growth," Occasional Papers, South East Asian Central Banks (SEACEN) Research and Training Centre, number occ47, April.
    12. Júlia Király & Márton Nagy & Viktor E. Szabó, 2008. "Contagion and the beginning of the crisis – pre-Lehman period," MNB Occasional Papers 2008/76, Magyar Nemzeti Bank (Central Bank of Hungary).
    13. Subir Lall & Roberto Cardarelli & Selim Elekdag, 2009. "Financial Stress, Downturns, and Recoveries," IMF Working Papers 09/100, International Monetary Fund.
    14. Cardarelli, Roberto & Elekdag, Selim & Lall, Subir, 2011. "Financial stress and economic contractions," Journal of Financial Stability, Elsevier, vol. 7(2), pages 78-97, June.
    15. Tao Sun, 2015. "The Impact of Global Liquidity on Financial Landscapes and Risks in the ASEAN-5 Countries," IMF Working Papers 15/211, International Monetary Fund.


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